If the cost of capital for this project is 13%, what is your estimate of the value of this project?

Problem 9-1 7b Ea Question Help Q You are a manager at Northern Fibre, which is considering expanding its operations in synthetic bre manufacturing, Your boss comes into your ofce, drops a consultant's report on your desk, and complains, "We owe these consultants $1.8 million for this report, and I am not sure their analysis makes sense. Before we spend the $16 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): Project Year Earnings Forecast ($000,000s) 1 2 . . . 9 10 Sales revenue 33.000 33.000 33.000 33.000 - Cost of goods sold 19.800 19.800 19.800 19,800 = Gross prot 13.200 13.200 13.200 13.200 - General, sales, and administrative expenses 1.280 1.280 1.280 1.280 - Depreciation 1.600 1.600 1.600 1.600 = Net operating income 10.3200 10.3200 10.3200 10.3200 7 - Income tax 3.612 3.612 3.612 3.612 = Net operating income 10.3200 10.3200 10.3200 10.3200 - Income tax 3.612 3.612 3.612 3.612 = Net income 6708 6.708 6.708 6.708 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. Canada Revenue Agency allows a CCA rate of 30% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $6.708 million per year for ten years, the project is worth $67.08 million. You think back to your glory 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 $12 million in working capital up front (year 0), which will be fully recovered in year 10. Next, you see they have attributed $1.28 million of selling, general and administrative expenses to the project, but you know that $0.64 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 13%, what is your estimate of the value of the new project? b. If the cost of capital for this project is 13%, what is your estimate of the value of the new project? Value of project: $ million (Round to three decimal places.)