I attempted this question both by hand and in excel, and have not had much luck. Any help would be greatly appreciated!
7. You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic ber manufacturing. Your boss comes into your ofce, drops a consultant's report on your desk, and complains, "We owe these consultants $13 'on 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 nd the following estimates (in millions of dollars): (Click on the following icon D1 in order to copy its contents into a spreadsheet.) Project Year Earnlngs Forecast (3 mllllon) 1 2 . . . 9 10 Sales revenue 35.000 35.000 35.000 35.000 - Cost of goods sold 21.000 21.000 21.000 21.000 = Gross prot 14.000 14.000 14.000 14.000 - Selling, general, and administrative expenses 2.080 2.080 2.080 2.080 - Depreciation 2.600 2.600 2.600 2.600 = Net operating income 9.320 9.320 9.320 9.320 - Income tax 1.864 1.864 1.864 1.864 = Net unlevered income 7.456 7.456 7.456 7.456 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 $7.456 million per year for ten years, the project is worth $74.56 million. You think back to your halcyon days in nance 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 $8 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 incuned 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? I). If the cost of capital for this project is 13%, what is your estimate of the value of the new project? a. Given the available information, what are the free cash ows in years 0 through 10 that should be used to evaluate the proposed project? The free cash flow for year 0 is $ million. (Round to three decimal places and enter a decrease as a negative number.) The free cash ow for years 1 to 9 is $ million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for year 10 is $ million. (Round to three decimal places and enter a decrease as a negative number.) b. If the cost of capital for this project is 13%, what is your estimate of the value of the new project? The value of the project is $ million. (Round to three decimal places.)
