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$$ complains, $"$We owe these consultants $ $1\mathrm{.}1$ million for this$$ 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 millions of$$ dollars$)$:

$1$

$2$

$...$

$9$

$10$

Sales revenue

$30\mathrm{.}000$

$30\mathrm{.}000$

$30\mathrm{.}000$

$30\mathrm{.}000$

minusCost of goods sold

$18\mathrm{.}000$

$18\mathrm{.}000$

$18\mathrm{.}000$

$18\mathrm{.}000$

equalsGross profit

$12\mathrm{.}000$

$12\mathrm{.}000$

$12\mathrm{.}000$

$12\mathrm{.}000$

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

$2\mathrm{.}000$

$2\mathrm{.}000$

$2\mathrm{.}000$

$2\mathrm{.}000$

minusDepreciation

$2\mathrm{.}500$

$2\mathrm{.}500$

$2\mathrm{.}500$

$2\mathrm{.}500$

equalsNet operating income

$7\mathrm{.}5000$

$7\mathrm{.}5000$

$7\mathrm{.}5000$

$7\mathrm{.}5000$

minusIncome tax

$2\mathrm{.}625$

$2\mathrm{.}625$

$2\mathrm{.}625$

$2\mathrm{.}625$

equalsNet income

$4\mathrm{.}875$

$4\mathrm{.}875$

$4\mathrm{.}875$

$4\mathrm{.}875$

All of the estimates in the report seem correct. You note that the consultants used$$ straight$-$line depreciation for the new equipment that will be purchased today$($year $0),$ which is what the accounting department recommended for financial reporting purposes. CRA allows a CCA rate of $45\%$ on the equipment for tax purposes. The report concludes that because the project will increase earnings by $ $4\mathrm{.}875$ million per year for ten$$ years, the project is worth $ $48\mathrm{.}75$ 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 $ $14$ million in working capital up front$($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$!$

b$.$ If the cost of capital for this project is $13\%,$ what is your estimate of the value of the new$$ project?

Question content area bottom

Part $1$

b$.$ If the cost of capital for this project is $13\%,$ what is your estimate of the value of the new$$ project?

Value of projectequals$$$

$$

enter your response here million$($Round to three decimal$$ places.$)$sure their analysis makes sense. Before we spend the $$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 millions of dollars$)$:

$\backslash$table$[[,1,2,1,9,10],[$Sales revenue,$30\mathrm{.}000,30\mathrm{.}000,,30\mathrm{.}000,30\mathrm{.}000],[-$ Cost of goods sold,$18\mathrm{.}000,18\mathrm{.}000,,18\mathrm{.}000,18\mathrm{.}000],[=$ Gross profit,$12\mathrm{.}000,12\mathrm{.}000,,12\mathrm{.}000,12\mathrm{.}000],[-$ General, sales, and administrative expenses,$2\mathrm{.}000,2\mathrm{.}000,,2\mathrm{.}000,2\mathrm{.}000],[-$ Depreciation,$2\mathrm{.}500,2\mathrm{.}500,,2\mathrm{.}500,2\mathrm{.}500],[=$ Net operating income,$7\mathrm{.}5000,7\mathrm{.}5000,,7\mathrm{.}5000,7\mathrm{.}5000],[-$ Income tax,$2\mathrm{.}625,2\mathrm{.}625,,2\mathrm{.}625,2\mathrm{.}625],[-$ Net income,$4\mathrm{.}875,4\mathrm{.}875,,4\mathrm{.}875,4\mathrm{.}875]]$

b$.$ If the cost of capital for this project is $13\%,$ what is your estimate of the value of the new project?

Value of project $=$$ million $($Round to three decimal places.$)$