You are a manager at Percolated Fiber, which is considering expanding its operations by starting a new project. You thought that you had estimated the complete FCFs (free cash flows) to evaluate the project, but your assistant has brought up possible effects that you had not yet considered. Here are your current estimates (in millions of dollars; note that the question is continued below, so you need to scroll down to see it

all):

012

FCF

46

32

46

Everything that you have calculated is correct as far as it goes, but you need to decide how, if at all, to adjust for the following factors that your assistant has pointed out.

First, the project will utilize other equipment that you did not value separately because the equipment is already owned and not being used in other projects. However, the equipment could instead be donated to a charity, for a tax benefit of

$4.8

million (in other words, this is the total amount that your taxes would decrease by in period 0, if you donated the equipment rather than using it for the project). Or, a second alternative is that the equipment could instead be sold for an after-tax benefit of

$6

million (in dollars today).

Second, there will be additional benefits from this new product line due to increased reputation and attracting new customers who will also start using your existing products. This increased business would have a net (after tax) effect of

$3

million per year in added profit from your other products, over the two years you would be producing the new product.

Last, much management time has been spent trying to analyze whether or not this new product line is desirable, and you estimate that the opportunity cost of the analysis that has already been done has been around $0.7 million.

What are the correct free cash flows (FCFs) to be used when evaluating this project? Report them in millions of dollars, not in dollars.

[Note: Again, this is a Professor-generated question, so there is no "Show Me An Example" in MyLabs. But we worked many versions of this problem, and it follows the general principles on 'which CFs to count' from class, so see the slides for Chapter 9 Part 1.]

Question content area bottom

Part 1

The first relevant period's FCF is:enter your response here

The second relevant period's FCF is:enter your response here

The third relevant period's FCF, if any, is:enter your response here