Suppose futures prices change each day as follows.

a$.$ What is the marking$-$to$-$market profit or loss $($in dollars$)$ that you will have on each date?

b$.$ What is your total profit or loss after $10$ days? Have you been protected against a rise in oil prices?

c$.$ What is the largest cumulative loss you will experience over the $10-$day period? In what case might this be a problem?

Future Prices

a$.$ What is the marking$-$to$-$market profit or loss $($in dollars$)$ that you will have on each date?

$($Round the price change to the nearest cent and the profit$/$loss to the nearest dollar.$)$

$\backslash$table$[[$Day$,$Price,Price Change,Profit$/$Loss$,],[0,$$$,60\mathrm{.}01,,],[1,$$$,59\mathrm{.}51,$$$,$$Question content area top

Part $1$

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$$ complains, $"$We owe these consultants $ $1\mathrm{.}5$ million for this$$ report, and I am not sure their analysis makes sense. Before we spend the $ $28$ 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$)$:

$1$

$2$

$...$

$9$

$10$

Sales revenue

$31\mathrm{.}000$

$31\mathrm{.}000$

$31\mathrm{.}000$

$31\mathrm{.}000$

minusCost of goods sold

$18\mathrm{.}600$

$18\mathrm{.}600$

$18\mathrm{.}600$

$18\mathrm{.}600$

equalsGross profit

$12\mathrm{.}400$

$12\mathrm{.}400$

$12\mathrm{.}400$

$12\mathrm{.}400$

minus$$General$,$sales$,$ and administrative expenses

$2\mathrm{.}240$

$2\mathrm{.}240$

$2\mathrm{.}240$

$2\mathrm{.}240$

minusDepreciation

$2\mathrm{.}800$

$2\mathrm{.}800$

$2\mathrm{.}800$

$2\mathrm{.}800$

equalsNet operating income

$7\mathrm{.}360$

$7\mathrm{.}360$

$7\mathrm{.}360$

$7\mathrm{.}360$

minusIncome tax

$2\mathrm{.}576$

$2\mathrm{.}576$

$2\mathrm{.}576$

$2\mathrm{.}576$

equalsNet income

$4\mathrm{.}784$

$4\mathrm{.}784$

$4\mathrm{.}784$

$4\mathrm{.}784$

All of the estimates in the report seem correct. You note that the consultants used$$ straight$-$line depreciation for the new equipment that will be purchased today$($year $0),$ which is what the accounting department recommended for financial reporting purposes. CRA allows a CCA rate of $30\%$ on the equipment for tax purposes. The report concludes that because the project will increase earnings by $ $4\mathrm{.}784$ million per year for $10$ years, the project is worth $ $47\mathrm{.}84$ million. You think back to your glory days in finance class and realize there is more work to be$$ done!$$

First you note that the consultants have not factored in the fact that the project will require $ $12$ million in working capital up front$($year $0),$ which will be fully recovered in year $10.$ Next you see they have attributed $ $2\mathrm{.}24$ million of$$ selling, general and administrative expenses to the$$ project, but you know that $ $1\mathrm{.}12$ 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?