Question

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 $1.3 million for this​ report, and I am not sure their analysis makes sense. Before we spend the $26 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):

1 2 9 10 32.000 19.200 Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income - Income tax = Net income 32.000 19.200 12.800 2.080 2.600 8.1200 2.842 12.800 2.080 2.600 32.000 19.200 12.800 2.080 2.600 8.1200 2.842 5.278 32.000 19.200 12.800 2.080 2.600 8.1200 2.842 8.1200 2.842 5.278 5.278 5.278

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 for financial reporting purposes. CRA allows a CCA rate of 20% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $5.278 million per year for ten​ years, the project is worth $52.78 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 factored in the fact that the project will require $8 million in working capital up front​ (year 0), which will be fully recovered in year 10. Next you see they have attributed $2.08 million of​ selling, general and administrative expenses to the​ project, but you know that $1.04 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!

QUESTION

b. If the cost of capital for this project is 13%​, what is your estimate of the value of the new​ project? (Round to three decimals).

PLEASE MAKE SURE YOURE 100% CORRECT AND ILL LEAVE A THUMBS UP!

Answer 1

cost year Sales General Sones d Admin expenses Depr ecintion ) Net Poeeting lorer sold Det Irrome Tax Income 32,000 14200 1040 2600 9.16 3.206 5.954 2 32000 19200 1.040 14.680 7.08 2.478 4.602 3 19.200 1040 3.744 8.016 2.8035 5.2065 32.000 4 19200 1840 32poo 19.200 IPGO 5 32,000 32,000 19200 4040 2.995 8.765 3.068 5.69725 2.396 9.364 3.278 16.0866 1.917 9.843 30445 16:398 110-227 1.533 2.579 6.647 6-846 3-680 10227 10-533 1040 32ooo 19200 7 1040 19200 32000 16.981 10.779 3.772 7.000 1040 320D 19: 200 S 5.092) 13.926. 2-741 7.834 оцо 19200 10 32000 * general Admimbatre, selling expense = 2.080 - 1.040 y 19ome tax rate 8.12 100 351 2.842 X Sine For Tax propose CRA allows CCA rate of 20% SLM Sate at 10% cannot be used

Therefore the depreciation date Zoo Frost years be 1₂x RCCA saite x cost 2-6m. A 10% x 20m = years. and 20% for the consecutive Bo value of the new project (NPV = cost in year 26m+ 8m 34 million 34.000 + 5.954 (13,0 +4.602 (13,2) + 5.2065 (13,2 ) + 6.697 (174) + 6-086 (13,5)46.393 (13,674 6.447 (13,7) 6-946 (13,0) + 7.000 (13,9) + 13.0921( 13.10) - 34+ 5.269+ 3.603 + 3.608 + 3.492 + 30305+ 3.0717 2.750 + 2.574 + 2-331+ .3.862. - 135 million for the conneang not feasible Therefore the bonect