You are a manager at Percolated? Fiber, which is consideringexpanding its operations in synthetic fiber manufacturing. Yourboss comes into your? office, drops a? consultant's report on your?desk, and? complains, "We owe these consultants

$ 1.5

million for this? report, and I am not sure their analysis makessense. Before we spend the

$ 24

million on new equipment needed for this? project, look it overand give me your? opinion." You open the report and find thefollowing estimates? (in millions of? dollars):

?(Click on the Icon located on the? top-right corner of the datatable below in order to copy its contents into a? spreadsheet.)

	Project Year
Earnings Forecast? ($ million)	1	2	. . .	9	10
Sales revenue	31.000	31.000		31.000	31.000
minus?Cost of goods sold	18.600	18.600		18.600	18.600
equals=Gross profit	12.400	12.400		12.400	12.400
minus??Selling, ?general, and administrative expenses	1.920	1.920		1.920	1.920
minus?Depreciation	2.400	2.400		2.400	2.400
equals=Net operating income	8.080	8.080		8.080	8.080
minus?Income tax	2.828	2.828		2.828	2.828
equals=Net unlevered income	5.252	5.252		5.252	5.252

All of the estimates in the report seem correct. You note thatthe consultants used? straight-line depreciation for the newequipment that will be purchased today? (year 0), which is what theaccounting department recommended. The report concludes thatbecause the project will increase earnings by

$ 5.252

million per year for ten? years, the project is worth

$ 52.52

million. You think back to your halcyon days in finance classand realize there is more work to be? done!??

?First, you note that the consultants have not factored in thefact that the project will require

$ 7

million in working capital upfront? (year 0), which will befully recovered in year 10.? Next, you see they have attributed

$ 1.92

million of? selling, general and administrative expenses to the?project, but you know that

$ 0.96

million of this amount is overhead that will be incurred even ifthe project is not accepted.? Finally, you know that accountingearnings are not the right thing to focus? on!

a. Given the available? information, what are the free cashflows in years 0 through 10 that should be used to evaluate theproposed? project?

b. If the cost of capital for this project is

14 %

what is your estimate of the value of the new? project?