Selling, general, and administrative expenses Depreciation Net operating income Income tax Net income 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 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 o), which is what the accounting department recommended for financial reporting purposes Canada Revenue Agency allows a CCA rate of 45 on the equipment for tax purposes The report concludes that because the project will increase earnings by $3 510 million per year for ten years, the project is worth $35 1 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 $12 million in working capital upfront (year o), which will be fully recovered in year 10 Next, you see they have attributed $2 4 million of selling, general and administrative expenses to the project, but you know that $1 2 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 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 The free cash flow for year 0 $million (Round to the nearest million) Selling, general, and administrative expenses Depreciation Net operating income Income tax Net income 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 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 o), which is what the accounting department recommended for financial reporting purposes Canada Revenue Agency allows a CCA rate of 45 on the equipment for tax purposes The report concludes that because the project will increase earnings by $3 510 million per year for ten years, the project is worth $35 1 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 $12 million in working capital upfront (year o), which will be fully recovered in year 10 Next, you see they have attributed $2 4 million of selling, general and administrative expenses to the project, but you know that $1 2 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 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 The free cash flow for year 0 $million (Round to the nearest million)

Question

Selling, general, and administrative expenses   Depreciation   Net operating income   Income tax   Net income 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 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 o), which is what the accounting department recommended for financial reporting purposes  Canada Revenue Agency allows a CCA rate of 45  on the equipment for tax purposes  The report concludes that because the project will increase earnings by $3 510 million per year for ten years, the project is worth $35 1 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 $12 million in working capital upfront (year o), which will be fully recovered in year 10  Next, you see they have attributed $2 4 million of selling, general and administrative expenses to the project, but you know that $1 2 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  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  The free cash flow for year 0   $million  (Round to the nearest million)    Selling, general, and administrative expenses   Depreciation   Net operating income   Income tax   Net income 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 2 400 3 000 5 4000 1 89 3 510 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 o), which is what the accounting department recommended for financial reporting purposes  Canada Revenue Agency allows a CCA rate of 45  on the equipment for tax purposes  The report concludes that because the project will increase earnings by $3 510 million per year for ten years, the project is worth $35 1 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 $12 million in working capital upfront (year o), which will be fully recovered in year 10  Next, you see they have attributed $2 4 million of selling, general and administrative expenses to the project, but you know that $1 2 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  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  The free cash flow for year 0   $million  (Round to the nearest million)

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Question

- Selling, general, and administrative expenses - Depreciation = Net operating income - Income tax = Net income 2.400 3.000 5.4000 1.89 3.510 2.400 3.000

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