You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
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 $1.1 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): Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income -Income tax = Net Income Project Year 1 2 32.000 32.000 19.200 19.200 12.800 12.800 2.080 2.080 2.600 8.120 2.274 5.846 2.600 8.120 2.274 5.846 9 32.000 19.200 12.800 2.080 2.600 8.120 2.274 5.846 10 32.000 19.200 12.800 2.080 2.600 8.120 2.274 5.846 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. The report concludes that because the project will increase earnings by $5.846 million per year for 10 years, the project is worth $58.46 million. You think back to your halcyon 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 $14 million in working capital upfront (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! 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 15%, what is your estimate of the value of the new project? 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 $1.1 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): Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income -Income tax = Net Income Project Year 1 2 32.000 32.000 19.200 19.200 12.800 12.800 2.080 2.080 2.600 8.120 2.274 5.846 2.600 8.120 2.274 5.846 9 32.000 19.200 12.800 2.080 2.600 8.120 2.274 5.846 10 32.000 19.200 12.800 2.080 2.600 8.120 2.274 5.846 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. The report concludes that because the project will increase earnings by $5.846 million per year for 10 years, the project is worth $58.46 million. You think back to your halcyon 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 $14 million in working capital upfront (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! 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 15%, what is your estimate of the value of the new project?
Expert Answer:
Answer rating: 100% (QA)
a Free cash flows for the project in millions Year 0 Capex for ne... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Three companies are trying to sell you their additives to reduce waste in a chemical manufacturing process. Youre not sure their products are appropriate because your process is different from the...
-
Do husbands and wives like the same TV shows? A recent study by Nielsen Media Research asked a young married couple to rank 14 shows from best to worst. A rank of 1 indicates the best-liked show and...
-
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...
-
Returning to the data set canadaemplmntdata from Problem 17.4, get a line chart of Accommodation jobs by subsetting by VECTOR = v81682. Problem 17.4 The file canadaemplmntdata contains quarterly...
-
Motorcross Delivery Service is owned and operated by Jim Smith. The following selected transactions were completed by Motorcross Delivery Service during February: 1. Received cash in exchange for...
-
Select the correct answer(s) for the following multiple-choice questions. Note that there may me more than one correct answer. Correct answers are bolded 1. Which of the following statements is (are)...
-
A 38.1-mm-diameter, \(0.0245-\mathrm{N}\) table tennis ball is released from the bottom of a 4-m-deep swimming pool. Assuming that the ball has reached its terminal velocity within \(1 \mathrm{~m}\),...
-
Frozen North Outfitters Inc. makes thermal clothing for winter sports and outdoor work. It is considering acquiring Downhill Fashions Corp., which manufactures and sells ski clothing. Downhill is...
-
Dry density (g/cm) 1.86 1.84 1.82 1.8 1.78 1.76 1.74 1.72 5 7 9 11 13 15 17 19 21 Water content (%) A series of standard Proctor compaction tests were performed on soil and the obtained results are...
-
Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Cisco Systems. Cisco Systems Consolidated Statements of...
-
ROOM_NO FLOOR NO BLGD_NAME POSTAL CODE DESCRIPTION SEATING CAPACITY a) ROOM b) (PK) (PK) (PK, FK1) (PK, FK2) consider the ENTITIES below. BUILDING BLGD NAME POSTAL CODE STREET MANAGER NAME MANAGER...
-
Suppose government spending increases. Would the effect on AD be larger if the central bank took no action in response, or if the central bank were committed to maintaining a fixed interest rate?...
-
Why is there concern over the loss of biodiversity?
-
How can the study of contemporary foragers provide us with an understanding of Paleolithic lifestyles?
-
Explain why feminist economists criticize the use of GDP as a measure of well-being.
-
What is the difference between sex and gender, and why is an understanding of this difference important in economic analysis?
-
The following information was obtained from the Quayle Company income statement: Earnings before Interest and Income Tax Expense $696,000 Interest expenses 80.500 Profit before Income Tax Expense...
-
Clark, PA, has been engaged to perform the audit of Kent Ltd.s financial statements for the current year. Clark is about to commence auditing Kents employee pension expense. Her preliminary enquiries...
-
Why is an American option with a longer time to expiration generally worth more than an otherwise identical option with a shorter time to expiration?
-
The Treadwater Bank wants to raise $1 million using three-month commercial paper. The net proceeds to the bank will be $985,000. What is the effective annual rate of this financing for Treadwater?
-
The following quote on Yahoo! stock appeared on April 13, 2010, on Yahoo! Finance: If you wanted to buy Yahoo!, what price would you pay per share? How much would you receive per share if you wanted...
-
Is it always possible to discern a trend in any time-series data? What problems might arise if trends are apportioned to time-series data that are not really present?
-
Why might household and firms confidence and expectations change leading to deviations in output from trend? Is there any way in which changes in confidence can be measured to provide an indicator of...
-
Firms experience a rise in stocks. Explain why this might have occurred and what you expect firms response to this event might be and how this might affect output.
Study smarter with the SolutionInn App