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omplete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need.
omplete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copypaste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section.
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 consultants report on your desk, and complains, We owe these consultants $ million for this report, and I am not sure their analysis makes sense. Before we spend the $ 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 thousands of dollars:
Project Year
Sales Revenue $ $ $ $
Cost of Goods Sold $ $ $ $
Gross Profit $ $ $ $
Selling, General, and
Administrative Expenses $ $ $ $
Depreciation $ $ $ $
EBIT $ $ $ $
Income Tax $ $ $ $
Net income $ $ $ $
"All of the estimates in the report seem correct. You note that the consultants used straightline depreciation for the new equipment that will be purchased today year which is what the accounting department recommended. They also calculated the depreciation assuming no salvage value for the equipment, which is the companys assumption in this case. The report concludes that because the project will increase earnings by $ million per year for years, the project is worth $ 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 included the fact that the project will require $ million in working capital up front year which will be fully recovered in year Next, you see they have attributed $ million of selling, general, and administrative expenses to the project, but you know that $ 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 through that should be used to evaluate the proposed project?
b If the cost of capital for this project is what is your estimate of the value of the new project?
Tax Rate
a Given the available information, what are the free cash flows in years through that should be used to evaluate the proposed project?
Year Year Year Year Year Year
Cost of Machine $
Change in Net Working Capital $
Sales Revenue $ $ $ $ $
Minus Cost of Goods Sold $ $ $ $ $
Equals Gross Profit
Minus Selling, General, and Administrative Expenses
$ $ $ $ $
Plus Overhead that would have occurred anyway
$ $ $ $ $
Minus Depreciation $ $ $ $ $
Equals Net Operating Income
Minus Income Tax
Equals Net Income
Plus Depreciation $ $ $ $ $
Cost of Machine plus Change in Net Working Capital
$ $ $ $ $
Equals Cash Flow
b If the cost of capital for this project is what is your estimate of the value of the new project?
Cost of Capital
NPV
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