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1 10.800 You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing Your boss comes into your office, drops a consultant's report on your desk and complains We owe these consultants $16 million for this report, and I am not sure their analysis makes sense. Before we spend the $17 million on new equipment needed for this project look at over and give me your opinion You open the report and find the following estimates (in millions of dollars) 2 9 10 Sales revenue 27000 27.000 27000 27000 - Cost of goods sold 16 200 16.200 16.200 16 200 = Gross profit 10 800 10.800 10.800 - General, sales, and administrative expenses 1360 1.360 1360 1.360 -Depreciation 1.700 1.700 1.700 1.700 Net operating income 7.7400 7.7400 7.7400 7 7400 - Income Tax 2709 2.709 2.709 2709 Net Income 5031 5031 5031 5031 All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new equipment that will be purchased today (year o), which is what the accounting department recommended for financial reporting purposes. CRA allows a CCA rate of 45% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $5.031 million per year for ten years, the project is worth $60.31 million. You think back to your glory days in finance class and realize there is more work to be donet First you note that the consultants have not factored in the fact that the project will require $8 million in working capital up front Year O), which will be tully recovered in year 10 Next you see they have attributed $1.36 million of selling general and administrative expenses to the project, but you know that 50.68 million of this amount is overhead that will be incurred even if the project is not accepted Finally, you know that accounting earnings are not the right thing to focus ont b. It the cost of capital for this project is 13% what is your estimate of the value of the new project? b. If the cost of capital for this project is 13% what is your estimate of the value of the new project? Value of project = 5 milion Round to three decimal places)

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