ou are a manager at Percolated Fiber, which is considering expanding its operations. Your boss said to you We already owe these consultants $300,00, and all they gave us is Net Income. Before we spend $48 million on new equipment for this project, look the report over and give me your opinion. Here are the reports estimates (in millions of dollars; note that the question is continued below, so you need to scroll down to see it

all):

1 2 3

Sales revenue

64.0

64.0 64.0- Cost of goods sold

39.0

39.0 39.0

Gross profit

25.0

25.0

25.0

-Selling, gen. & admin. exp. 1.8 1.8 1.8

-Depreciation

16.0

16.0 16.0

Net operating income7.2 7.2 7.2

- Income tax (30%)2.2 2.2 2.2

Net Income

5.0

5.0 5.0Everything that the consultants have calculated is correct, as far as it goes. The project will require

$7

million in working capital upfront (year 0), which will be fully recovered in the last year of the project (year 3).The project will also utilize other equipment that the consultants did not value separately because the equipment is already owned and not being used in other projects. The equipment could instead be donated to a charity. There would be no tax benefit from that donation because the equipment is fully depreciated, but donating the equipment would generate goodwill and increased reputation which you feel would be worth

$1.1

million (in dollars today).Your cost of capital is

9%.

What are the correct free cash flows (FCFs) to be used when evaluating this project? Report them in millions of dollars, not in dollars. Note that the answer is NOT the NPV, but the incremental FCFs needed for each relevant period.

Hints:

(a) Start from the correct Net Income which has already been given.

(b) Make any additional adjustments needed for each relevant period, in order to get the final, complete set of FCFs.

(c) We worked two variations of this problem (Percolated Fiber) in the class slides, so see the slides if you're not sure how to approach it.