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 $1.6 million forthis​ report, and I am not sure their analysis makes sense. Beforewe spend the $23 million on new equipment needed for this​ project,look it over and give me your​ opinion.\" You open the report andfind the following estimates​ (in millions of​ dollars):
| Project Year | |
Earnings Forecast​ ($ million) | 1 | 2 | . . . | 9 | 10 |
Sales revenue | 30.00030.000 | 30.00030.000 | | 30.00030.000 | 30.00030.000 |
minus−Cost of goods sold | 18.00018.000 | 18.00018.000 | | 18.00018.000 | 18.00018.000 |
equals=Gross profit | 12.00012.000 | 12.00012.000 | | 12.00012.000 | 12.00012.000 |
minus−​Selling, ​general, and administrative expenses | 1.8401.840 | 1.8401.840 | | 1.8401.840 | 1.8401.840 |
minus−Depreciation | 2.3002.300 | 2.3002.300 | | 2.3002.300 | 2.3002.300 |
equals=Net operating income | 7.8607.860 | 7.8607.860 | | 7.8607.860 | 7.8607.860 |
minus−Income tax | 2.7512.751 | 2.7512.751 | | 2.7512.751 | 2.7512.751 |
equals=Net unlevered income | 5.1095.109 | 5.1095.109 | | 5.1095.109 | 5.1095.109 |
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 $5.109 million peryear for ten​ years, the project is worth $51.09 million. You thinkback to your halcyon days in finance class and realize there ismore work to be​ done!  
​First, you note that the consultants have not factored in thefact that the project will require $14 million in working capitalupfront​ (year 0), which will be fully recovered in year 10.​ Next,you see they have attributed $1.84 million of​ selling, general andadministrative expenses to the​ project, but you know that $0.92million of this amount is overhead that will be incurred even ifthe project is not accepted.​ Finally, you know that accountingearnings are not the right thing to focus​ on!
a. Given the available​ information, what are the free cashflows in years 0 through 10 that should be used to evaluate theproposed​ project?
b. If the cost of capital for this project is 16%​,
what is your estimate of the value of the new​ project?
Given the available​ information, what are the free cash flowsin years 0 through 10 that should be used to evaluate the proposed​project?
The free cash flow for year 0 is ​$____million. ​ (Round tothree decimal places and enter a decrease as a negative​number.)
The free cash flow for years 1 to 9 is ​$_____million. ​(Roundto three decimal places and enter a decrease as a negative​number.)
The free cash flow for year 10 is ​$____million. ​ (Round tothree decimal places and enter a decrease as a negative​number.)
b. If the cost of capital for this project is 16 %
what is your estimate of the value of the new​ project?
The value of the project is ​$____million. ​ (Round to threedecimal​ places.)
