You are a manager at Percolated? Fibre, which is considering expanding its operations in synthetic fibre...

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Finance

You are a manager at Percolated? Fibre, which is consideringexpanding its operations in synthetic fibre manufacturing. Yourboss comes into your? office, drops a? consultant's report on your?desk, and? complains, "We owe these consultants $ 1.1 million forthis? report, and I am not sure their analysis makes sense. Beforewe spend the $ 16.3 million on new equipment needed for this?project, look it over and give me your? opinion." You open thereport and find the following estimates? (in millions of?dollars):
Earnings forecast   1   2   . ..   9   10
Sales revenue   26.000   26.000      26.000   26.000
- Cost of goods sold   15.600  15.600       15.600  15.600
Gross profit   10.400   10.400      10.400   10.400
- General, sales and administrative expenses  1.304   1.304      1.304   1.304
- Depreciation   1.630   1.630      1.630   1.630
Net operating profit   7.466  7.466       7.466   7.466
- Income tax   2.24   2.24      2.24   2.24
Net profit   5.226   5.226      5.226   5.226
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. They also calculated thedepreciation assuming no salvage value for the? equipment, which isthe? company's assumption in this case. The report concludes thatbecause the project will increase earnings by $ 5.226 million peryear for ten? years, the project is worth $ 52.26 million. Youthink back to your glory days in finance class and realise there ismore work to be? done! ?First, you note that the consultants havenot factored in the fact that the project will require $ 9.2million in net working capital up front? (year 0), which will befully recovered in year 10.? Next, you see they have attributed $1.304 million of? selling, general and administrative expenses tothe? project, but you know that $ 0.652 million of this amount isoverhead that will be incurred even if the project is notaccepted.? Finally, you know that accounting earnings are not theright thing to focus? on! a. Given the available? information, whatare the free cash flows in years 0 to 10 that should be used toevaluate the proposed? project? b. If the cost of capital for thisproject is 15 %?, what is your estimate of the value of the new?project?
a. The free cash flow for year 0 is ?$ nothing million. ?(Roundto three decimal? places.) The free cash flow for years 1 to 9 is?$ nothing million. ?(Round to three decimal? places.) The freecash flow for year 10 is ?$ nothing million. ?(Round to threedecimal? places.) b. If the cost of capital for this project is 15%?, the value of project is ?$ nothing million. ?(Round to threedecimal? places.) You should not/should accept the project.?(Choose the best answer from the drop down? menu.)

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You are a manager at Percolated? Fibre, which is consideringexpanding its operations in synthetic fibre manufacturing. Yourboss comes into your? office, drops a? consultant's report on your?desk, and? complains, "We owe these consultants $ 1.1 million forthis? report, and I am not sure their analysis makes sense. Beforewe spend the $ 16.3 million on new equipment needed for this?project, look it over and give me your? opinion." You open thereport and find the following estimates? (in millions of?dollars):Earnings forecast 1 2 . .. 9 10Sales revenue 26.000 26.000 26.000 26.000- Cost of goods sold 15.600 15.600 15.600 15.600Gross profit 10.400 10.400 10.400 10.400- General, sales and administrative expenses 1.304 1.304 1.304 1.304- Depreciation 1.630 1.630 1.630 1.630Net operating profit 7.466 7.466 7.466 7.466- Income tax 2.24 2.24 2.24 2.24Net profit 5.226 5.226 5.226 5.226All 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. They also calculated thedepreciation assuming no salvage value for the? equipment, which isthe? company's assumption in this case. The report concludes thatbecause the project will increase earnings by $ 5.226 million peryear for ten? years, the project is worth $ 52.26 million. Youthink back to your glory days in finance class and realise there ismore work to be? done! ?First, you note that the consultants havenot factored in the fact that the project will require $ 9.2million in net working capital up front? (year 0), which will befully recovered in year 10.? Next, you see they have attributed $1.304 million of? selling, general and administrative expenses tothe? project, but you know that $ 0.652 million of this amount isoverhead that will be incurred even if the project is notaccepted.? Finally, you know that accounting earnings are not theright thing to focus? on! a. Given the available? information, whatare the free cash flows in years 0 to 10 that should be used toevaluate the proposed? project? b. If the cost of capital for thisproject is 15 %?, what is your estimate of the value of the new?project?a. The free cash flow for year 0 is ?$ nothing million. ?(Roundto three decimal? places.) The free cash flow for years 1 to 9 is?$ nothing million. ?(Round to three decimal? places.) The freecash flow for year 10 is ?$ nothing million. ?(Round to threedecimal? places.) b. If the cost of capital for this project is 15%?, the value of project is ?$ nothing million. ?(Round to threedecimal? places.) You should not/should accept the project.?(Choose the best answer from the drop down? menu.)