Calculate the impact the new product will have

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Question: During 2016, ACME Inc. earned a return on net operating assets (RNOA) of 14 percent from sales of $900 million and after-tax operating income of $60 million. Its required return on operations is 10 percent. The December 31, 2016 balance sheet reports net operating assets (NOA) of $450 million, net financial obligations (NFO) of $50 million and common stock equity (CSE) of $400 million.Management forecasts that RNOA is likely to continue at the same level in the future with organic growth in sales of 3 percent and growth in net operating assets to support sales of 3 percent per year. As the past year was ending, Management considered introducing a new product at the start of 2017 that is expected to increase future sales growth rate from 3 percent to 4 percent while maintaining the current profit margin of 7 percent. But the plan will require additional investment of $90 million in net operating assets that will reduce ACME's asset turnover from 2.0 to 1.67 going forward.

Calculate the impact the new product will have on the value of the firm. (Hint: Use a ReOI valuation)

Reference no: EM131924941

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