Question

(**quick disclaimer: The free cash flows EACH year is suppose to be a different number each time cause my previous question answered on here had years 1-9 the same number throughout, but it was marked wrong. This my third time uploading the same question but with different numbers so please be 100% sure your're correct )

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 Sales revenue Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income - Income tax = Net income 34.000 20.400 13.600 2.080 2.600 8.920 3.122 5.798 2 34.000 20.400 13.600 2.080 2.600 9 34.000 20.400 13.600 2.080 2.600 10 34.000 20.400 13.600 2.080 2.600 8.920 3.122 8.920 3.122 5.798 8.920 3.122 5.798 5.798

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 45% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $5.798 million per year for 10​ years, the project is worth $57.98 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 $11 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:

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?

1. The free cash flow for year 0 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

2. The free cash flow for year 1 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

3. The free cash flow for year 2 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

4. The free cash flow for year 3 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

5. The free cash flow for year 4 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

6. The free cash flow for year 5 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

7. The free cash flow for year 6 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

8. The free cash flow for year 7 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

9. The free cash flow for year 8 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

10. The free cash flow for year 9 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

11. The free cash flow for year 10 is $___ million. ​(Round to three decimal​ places, and enter a decrease as a negative​number.)

Answer 1

Note** In my answer also you will get all fund flow from 1 to 9 years same. If later on i realised that i was wrong i will update you.

Thanks

Solution

Year	Sales	Cost of Goods Sold	Addl General Sales & Administrative exp	Deprecaition	Net Profit for Tax	Tax Amount (35%)	Cash Flow from the Projects	Working Capital Investment	New Equipment Cost	Total Free Cash Flow from the projects
0	-	-	-	-	-	-		-11.000	-26.000	-37.000
1	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
2	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
3	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
4	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
5	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
6	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
7	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
8	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
9	34.000	20.400	2.080	2.600	8.920	3.122	8.398	-	-	8.398
10	34.000	20.400	2.080	2.600	8.920	3.122	8.398	11.000	-	19.398

*Additional General, Sales and Administrative Expenses relevant for proposed project

= $ 2.080 - 1.040 = $1.040 million

**Income Tax Rate = 3.122 / 8.920 = 35%