General, sales, and administrative expenses

1.360

1.360

1.360

1.360

minus

Depreciation

1.700

1.700

1.700

1.700

equals

Net operating income

10.1400

10.1400

10.1400

10.1400

minus

Income tax

3.549

3.549

3.549

3.549

equals

Net income

6.591

6.591

6.591

6.591

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

20 %

on the equipment for tax purposes. The report concludes that because the project will increase earnings by

$ 6.591

million per year for ten years, the project is worth

$ 65.91

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

$ 10

million in working capital up front (year 0), which will be fully recovered in year 10. Next you see they have attributed

$ 1.36

million of selling, general and administrative expenses to the project, but you know that

$ 0.68

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!

b. If the cost of capital for this project is

16 %

,

what is your estimate of the value of the new project?

b. If the cost of capital for this project is

16 %

,

what is your estimate of the value of the new project?

Value of

projectequals

$nothingmillion(Round to three decimal places.)