XP 9-31 (book/static) Question Hep You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic ber manufacturing Your boss comes into your office drops a consultant's report on your desk and complains, We owe these consultants 512 million for this report and I am not sure the analysis makes sense Before we spend the 520.9 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) 0 Earnings Forecast Sales Revenue - Cost of Goods Sold = Gross Profit - General, Sales and Administrative Expenses - Depreciation = Net Operating Income - Income Tax = Net Income 1 31.000 18.600 12.400 1.672 2.090 8.638 3.023 5.615 Project Year 2 31.000 18.600 12.400 1.672 2.090 8,638 3.023 5.615 9 31.000 18.600 12.400 1.672 2.090 8.638 3.023 5.615 10 31.000 18.600 12.400 1.672 2.090 8.638 3.023 5.615 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 ), 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 55 615 million per year for 10 years, the project is worth 556 15 You think back to your glory days in finance class and realize there is more work to be donel First, you note that the consultants have not included the fact that the project will require 59 8 million in working capital up front year), which will be fully recovered in year 10. Next, you see they have tributed 51672dion of seling general, and administrative expenses to the project, but you know that 50 836 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 through 10 that should be used to evaluate the proposed project? b. If the cost of capital for this project is 16% what is your estimate of the value of the new project? XP 9-31 (book/static) Question Hep You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic ber manufacturing Your boss comes into your office drops a consultant's report on your desk and complains, We owe these consultants 512 million for this report and I am not sure the analysis makes sense Before we spend the 520.9 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) 0 Earnings Forecast Sales Revenue - Cost of Goods Sold = Gross Profit - General, Sales and Administrative Expenses - Depreciation = Net Operating Income - Income Tax = Net Income 1 31.000 18.600 12.400 1.672 2.090 8.638 3.023 5.615 Project Year 2 31.000 18.600 12.400 1.672 2.090 8,638 3.023 5.615 9 31.000 18.600 12.400 1.672 2.090 8.638 3.023 5.615 10 31.000 18.600 12.400 1.672 2.090 8.638 3.023 5.615 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 ), 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 55 615 million per year for 10 years, the project is worth 556 15 You think back to your glory days in finance class and realize there is more work to be donel First, you note that the consultants have not included the fact that the project will require 59 8 million in working capital up front year), which will be fully recovered in year 10. Next, you see they have tributed 51672dion of seling general, and administrative expenses to the project, but you know that 50 836 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 through 10 that should be used to evaluate the proposed project? b. If the cost of capital for this project is 16% what is your estimate of the value of the new project