Problem 9-7a Question Help You are a manager at Northern Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, We owe these consultants $1,1 million for this report, and I am not sure their analysis makes sense. Before we spend the $15 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): (Click on the leon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet.) Project Year Earnings Forecast ($000,000s) 1 2 9 10 Sales revenue 28.000 28.000 20.000 28.000 -Cost of goods sold 16.800 16.800 16.800 10.800 Gross profit 11.200 11.200 11.200 11.200 -Selling, general, and administrative expenses 1.200 1.200 1.200 1.200 - Depreciation 1.500 1.500 1.500 1.500 Problem 9-7a Question Help - Depreciation 1.500 1.500 1.500 1.500 Net operating income 8.5000 8.5000 8.5000 8.5000 -Income tax 2.975 2.975 2.975 2.975 Net income 5.525 5.525 5.525 5.525 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). 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 camings by $5.625 million per year for ten years, the project is worth $55.25 milion. You think back to your halcyon days in finance class and realize there is more work to be donel First, you note that the consultants have not factored in the fact that the project will require $7 million in working capital upfront (year ), which will be fully recovered in year 10. Next, you see they have attributed $1.2 million of selling, general and administrative expenses to the project, but you know that $0.6 million of this amount is overhead that will be incurred even if the project is not accepted. Finally, you know that accounting earings are not the right thing to focus ont PO Problem 9-7a Question Help = Net operating income -Income tax = Net Income 8.5000 2.975 5.525 8.5000 2.975 5.525 8.5000 2.975 5,525 8.5000 2.975 5.525 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 eamings by $5.525 million per year for ten years, the project is worth $55 25 million. You think back to your halcyon 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 $7 million in working capital upfront (year O), which will be fully recovered in C year 10. Next, you see they have attributed $1.2 million of selling general and administrative expenses to the project, but you know that $0.6 million of this amount is overhead that will be incurred even if the project is not accepted. Finally, you know that accounting earings 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
