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Question Help You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing Your boss comes into your office,

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Question Help You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing Your boss comes into your office, 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 $20 million on new buipment 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) 1 2 9 10 Sales revenue 32.000 32.000 32.000 32,000 - Cost of goods sold 19 200 19.200 19.200 19.200 Gross profit 12.800 12.800 12.800 12800 General, sales, and administrative expenses 1.600 1.600 1.600 1.600 -Depreciation 2000 2.000 2.000 2.000 -Net operating income 9.2000 9.2000 9.2000 9.2000 -Income tax 3.22 3.22 3.22 322 - Net Income 5.980 5.980 5.980 5.980 b. the cost of capital for this project is 15%, what is your estimate of the value of the new project? Value of project = $milion Round to three decimal places) 3.22 Question Help -Depreciation 2.000 2.000 2.000 2.000 -Net eperating income 9.2000 9 2000 92000 --Income tax 3.22 3.22 3.22 Net income 5.080 5.980 5.080 5.980 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 yar ), which is what the accounting department recommended for financial reporting purposes. CRA allows a CCA rate of 20% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $5.900 milion per year for ten years, the project is worth $0.8 milion. You think back to your glory days in france dass and realize there is more work to be donet First you note that the consultants have not factored in the fact that the project will require $11 milion in working capital up front your Oj, which will be fully recovered in your 10. Next you see they have atributed $1.6 million of soling. general and administrative expenses to the project, but you know that $0.8 million of this amount is overhead that will be incurred even if the project is not accepted. Finaly, you know that accounting earings are not the right thing to focus on b. If the cost of capital for this project is 15%, what is your estimate of the value of the new project? b. If the cost of capital for this project is 15%, what is your estimate of the value of the new project? Value of project million (Round to three decimal places)

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