9.

7. You are a managor at Northem Fibre, which is considering expanding its operatons in synthetic fibre manufacturing. Your boss comes into your oflice, drops a consultanrs report on your desk, and complains, "We owe these consultants $1.7 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, lock 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 purchasod today (year 0), which is what the acoounting 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 $4.680 mallion per year for ten years, the project is worth $46.8 milton. You think back to your glory days in finance class and realize there is more work to be donel Finst you note that the consultants have not factored in the fact that the peoject will require $14 malion in working capital up front (year 0). which wil be fully recovered in year 10. Nexd you see they have attrbuled $1.6 millon of seling. general and adminiatrative expenses to the project, but you knew that so.8 million of this amount is overtead that wil be incurred even if the project is not accepted. Finally, you know that accounting eamings are not the right thing lo focus on! b. If the cost of capital for this project is 14%, what is your estimate of the value of the new project? b. If the cost of captal for this project is 14%, what is your estimate of the value of the new project? Value of project =$ million (Round to three decimal places.)