Question list

$(2)$ Question $10$

$(2)$ Question $11$

$($ Question $12$

$($ Question $13$

$($ Question $14$

x$/$s Question $15$

$()$ Question $16$

Data table

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\mathrm{.}100$ million for

this report, and I am not sure their analysis makes sense. Before we spend the $$28\mathrm{.}700$

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$)$:

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 $$6\mathrm{.}347$ million per year for $10$ years, the

project is worth $$63\mathrm{.}470$ 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

$$9\mathrm{.}900$ million in working capital up front $($year $0),$ which will be fully recovered in year

Next, you see they have attributed $$2\mathrm{.}296$ million of selling, general, and

administrative expenses to the project, but you know that $$1\mathrm{.}148$ 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$!$

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?

b$.$ If the cost of capital for this project is $12\%,$ 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.$)$