Q$8.$ 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 consultant's report on your desk, and

complains, $"$We owe these consultants $$1$ million for this report, and I am not sure their analysis makes

sense. Before we spend the $$25$ 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$)$:

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

$$4\mathrm{.}875$ million per year for $10$ years, the project is worth $$48\mathrm{.}75$ 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 $$10$ million

in working capital upfront $($year $0),$ which will be fully recovered in year $10.$ Next, you see they have

attributed $$2$ million of selling, general and administrative expenses to the project, but you know that

$$1$ 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 $0$ through $10$ that should be

used to evaluate the proposed project?

b$.$ If the cost of capital for this project is $14\%,$ what is your estimate of the value of the new project?