Question

You are a manager at Percolated​ Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your​ office, drops a​ consultant's report on your​ desk, and​ complains, "We owe these consultants $1.4 million for this​ report, and I am not sure their analysis makes sense. Before we spend the $19.5 million on new equipment needed for this​ project, look it over and give me your​ opinion." You open the report and find the following estimates​ (in millions of​ dollars):

	Project Year
Earnings Forecast	1	2	. . .	9	10
Sales Revenue	29.00029.000	29.00029.000		29.00029.000	29.00029.000
minus−Cost of Goods Sold	17.40017.400	17.40017.400		17.40017.400	17.40017.400
equals=Gross Profit	11.60011.600	11.60011.600		11.60011.600	11.60011.600
minus−​General, Sales and Administrative Expenses	1.5601.560	1.5601.560		1.5601.560	1.5601.560
minus−Depreciation	1.9501.950	1.9501.950		1.9501.950	1.9501.950
equals=Net Operating Income	8.0908.090	8.0908.090		8.0908.090	8.0908.090
minus−Income Tax	2.8322.832	2.8322.832		2.8322.832	2.8322.832
equals=Net Income	5.2585.258	5.2585.258		5.2585.258	5.2585.258

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 0), which is what the accounting department recommended. They also calculated the depreciation assuming no salvage value for the equipment. The report concludes that because the project will increase earnings by $5.258 million per year for 10​ years, the project is worth $52.58 million. You think back to your glory days in finance class and realize there is more work to be​ done! First, you note that the consultants have not included the fact that the project will require $11.7 million in working capital up front​ (year 0), which will be fully recovered in year 10.​ Next, you see they have attributed $1.560 million of​ selling, general, and administrative expenses to the​ project, but you know that $0.780 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​ on!

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

a. Given the available​ information, what are the free cash flows in years 0 through 10 that should be used to evaluate the proposed​ project?

The free cash flow for year 0 is___million.  ​(Round to three decimal​ places.)

The free cash flow for years 1 to 9 is___million.  ​(Round to three decimal​ places.)

The free cash flow for year 10 is___million.  ​(Round to three decimal​ places.)

b. If the cost of capital for this project is 15%​, what is your estimate of the value of the new​ project?

If the cost of capital for this project is 15%​, the value of the project is___million. ​(Round to three decimal​ places.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

@iv 1x 2 W ENG . E 07:56 14-03-2020 ... o X fix GW GX GYGZ HA HB HC HD HEHEHGA HE535 - X A GU GV 513 514 515 FCF CALCULATIONS 516 ADD FCF CALCULATIONS 0 10 1 TO 9 5.258 0.507 1.95 5.258 0.507 [=(1.56*50%*(1-0.35))] TAX RATE INCOME TAX/OPERATING INCOME 2.832/8.09 = 35% [SEE GIVEN STATEMENT] 517 518 ADD 1.95 YEARS ------ NET INCOME OVERHEAD (AFTER TAX @35%) DEPRECIATION INVESTMENT IN FIXED ASSETS INCREASE IN WORKING CAPITAL RECOVERY WORKING CAPITAL FREE CASH FLOW (FCF) 519 520 521 522 523 524 525 -19.500 -11.700 11.700 19.415 -31.200 7.715 FCF FOR YEAR O = FCF FOR YEAR 1 TO 9 = FCF FOR YEAR 10 = -31.200 7.715 19.415 -31.200 [round to 3 decimals] 7.715 [round to 3 decimals) 19.415 [round to 3 decimals] note 526 527 528 529 EXCEL PVIFA @15%, 9 YEARS PVIF @15%, 10 YEARS 4.771584 0.247185 NPV = PV OF ALL CFAT - INVESTMENT (7.715 X PVIFA@15%, 9 YEARS ) + (19.415 X PVIF@15%,10 YEARS) - 31.200 (7.715 X 4.771584 ) + (19.415 X 0.247185) - 31.200 10.412 MILLION 530 531 VALUE = 532 533 YES, YOU SHOULD ACCCEPT THE PROJECT AS VALUE IS POSITIVE 534 535 536 ... STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS price quote LEVER, ... + -