You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
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 $1.8 million for this report, and I am not sure their analysis makes sense. Before we spend the $20 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): Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income Income tax = Net income 2 1 25.000 15.000 25.000 15.000 10.000 10.000 1.600 1.600 2.000 2.000 6.400 6.400 2.24 2.24 4.160 4.160 9 25.000 15.000 10.000 1.600 2.000 6.400 2.24 4.160 10 25.000 15.000 10.000 1.600 2.000 6.400 2.24 4.160 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 $4.160 million per year for 10 years, the project is worth $41.6 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 $7 million in working capital up front (year 0), which will be fully recovered in year 10. Next you see they have attributed $1.6 million of selling, general and administrative expenses to the project, but you know that $0.8 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? The free cash flow for year 0 is $_million. The free cash flow for year 1 is $___million. The free cash flow for year 2 is $___million. The free cash flow for year 3 is $_million. The free cash flow for year 4 is $__million. The free cash flow for year 5 is $_million. The free cash flow for year 6 is $____million. The free cash flow for year 7 is $_million. The free cash flow for year 8 is $_million. The free cash flow for year 9 is $____million. The free cash flow for year 10 is $___million. 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 $1.8 million for this report, and I am not sure their analysis makes sense. Before we spend the $20 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): Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income Income tax = Net income 2 1 25.000 15.000 25.000 15.000 10.000 10.000 1.600 1.600 2.000 2.000 6.400 6.400 2.24 2.24 4.160 4.160 9 25.000 15.000 10.000 1.600 2.000 6.400 2.24 4.160 10 25.000 15.000 10.000 1.600 2.000 6.400 2.24 4.160 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 $4.160 million per year for 10 years, the project is worth $41.6 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 $7 million in working capital up front (year 0), which will be fully recovered in year 10. Next you see they have attributed $1.6 million of selling, general and administrative expenses to the project, but you know that $0.8 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? The free cash flow for year 0 is $_million. The free cash flow for year 1 is $___million. The free cash flow for year 2 is $___million. The free cash flow for year 3 is $_million. The free cash flow for year 4 is $__million. The free cash flow for year 5 is $_million. The free cash flow for year 6 is $____million. The free cash flow for year 7 is $_million. The free cash flow for year 8 is $_million. The free cash flow for year 9 is $____million. The free cash flow for year 10 is $___million.
Expert Answer:
Answer rating: 100% (QA)
Answer To determine the free cash flows for years 0 through 10 we need to adjust the net operating income by incorporating the relevant cash flow item... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0133400694
1st canadian edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford, David A. Stangeland, Andras Marosi
Posted Date:
Students also viewed these corporate finance questions
-
The following are the cash flows of two projects: Year Project A Project B 01234 $ (280) $ (280) 160 180 2 160 180 3 160 180 160 What is the payback period of each project? Note: Round your answers...
-
Describe the Three legal, ethical, or social concerns with the use of EHRs.
-
The contracting officer determined there is a high likelihood that all four of the option years will be exercised after the base year award. In addition, the contracting officer foresees a potential...
-
Fill in the missing amounts for the following bank reconciliation: Practice Exercise3 Bank Reconciliation March 31,20 Bank Statement Balance $3,764.00 Add: Deposit in transit $4,031.00 Deduct:...
-
A radioactive isotope of mercury, 197Hg, decays to gold, 197Au, with a disintegration constant of 0.0108 6-t. (a) Calculate the half-life of the 167Hg. What fraction of a sample will remain at the...
-
Find the value of k such that the line kx - 3y = 10 (a) Is parallel to the line y = 2x + 4; (b) Is perpendicular to the line y = 2x + 4; (c) Is perpendicular to the line 2x + 3y = 6.
-
Sinclair Corp. manufactures radiation-shielding glass panels. Suppose Sinclair is considering spending the following amounts on a new TQM program: Sinclair expects the new program to save costs...
-
The production manager of a large Cincinnati manufacturing firm once made the statement, "I would like to use LP, but it's a technique that operates under conditions of certainty. My plant doesn't...
-
using deal and grove formula, Create a matlab code to show the General relationship for thermal oxidation of silicon using dry oxidation and wet oxidation. The solid line represents the general...
-
Use information on the endpapers of this book to calculate the average density of the Earth. Where does the value fit among those listed in Tables 1.5 and 14.1? Look up the density of a typical...
-
Click and Clack, the tappet brothers, and their lawyers, Dewey, Cheatem, and Howe, have been given the "fabulous opportunity" to invest in two proposed new inventions operating in cycles, which are...
-
At what rate of income tax is each of the following types of payment relieved in tax year 2017-18? (a) interest on a qualifying home loan used to buy an annuity (b) interest on a loan used to buy an...
-
An interest in possession trust with two life tenants has the following income in tax year 2017-18: Property expenses incurred in the year were 2,220 and general administration expenses amounted to...
-
Pauline (born May 1937) marries Adrian (born March 1935) on 17 October 2017 . Their income for 2017-18 is as follows: During 2017-18, Adrian pays maintenance of 4 ,000 to his former wife, as required...
-
Edward has the following income in 2017-18: Bank interest Loan stock interest (net) Dividends received 2,250 14,520 50,600 He makes 800 of Gift Aid donations during 2017 -18. Compute the amount of...
-
Imran owns a business which operates from rented premises. He has a 10 -year lease on the premises and paid a premium of 7,000 in order to obtain the lease. His income statement for the year to 31...
-
Explain how the private label cereal manufacturers havebeen able to lower their cost structure relative to the brandedcereal manufacturers by CREATING A EXCEL SHEET OR DATATABLE. Note: This is a...
-
What does non-recourse financing mean?
-
How can you distinguish cash inflows from outflows on a timeline?
-
The Laiterie de Coaticook in the Eastern Townships of Quebec produce several types of cheddar cheese. It markets this cheese in four vareties: aged 2 months, 9 months, 15 months and 2 years. At the...
-
What is the reasoning behind using the average annual return as a measure of expected return?
-
To what extent are the arguments for countries specialising and then trading with each other the same as those for individuals specialising in doing the jobs to which they are relatively well suited?
-
The following are four items that are traded internationally: wheat; computers; textiles; insurance. In which one of the four is each of the following most likely to have a comparative advantage:...
-
Debate the following: All arguments for restricting trade boil down to special pleading for particular interest groups. Ultimately there will be a net social cost from any trade restrictions.
Study smarter with the SolutionInn App