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 $ $24$ 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

$27\mathrm{.}000$

$27\mathrm{.}000$

$27\mathrm{.}000$

$27\mathrm{.}000$

minusCost of goods sold

$16\mathrm{.}200$

$16\mathrm{.}200$

$16\mathrm{.}200$

$16\mathrm{.}200$

equalsGross profit

$10\mathrm{.}800$

$10\mathrm{.}800$

$10\mathrm{.}800$

$10\mathrm{.}800$

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

$1\mathrm{.}920$

$1\mathrm{.}920$

$1\mathrm{.}920$

$1\mathrm{.}920$

minusDepreciation

$2\mathrm{.}400$

$2\mathrm{.}400$

$2\mathrm{.}400$

$2\mathrm{.}400$

equalsNet operating income

$6\mathrm{.}4800$

$6\mathrm{.}4800$

$6\mathrm{.}4800$

$6\mathrm{.}4800$

minusIncome tax

$2\mathrm{.}268$

$2\mathrm{.}268$

$2\mathrm{.}268$

$2\mathrm{.}268$

equalsNet income

$4\mathrm{.}212$

$4\mathrm{.}212$

$4\mathrm{.}212$

$4\mathrm{.}212$

All of the estimates in the report seem correct. You note that the consultants used$$ straight$-$line depreciation for the new equipment that will be purchased today$($year $0),$ which is what the accounting department recommended for financial reporting purposes. CRA allows a CCA rate of $30\%$ on the equipment for tax purposes. The report concludes that because the project will increase earnings by $ $4\mathrm{.}212$ million per year for ten$$ years, the project is worth $ $42\mathrm{.}12$ 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 $ $1\mathrm{.}92$ million of$$ selling, general and administrative expenses to the$$ project, but you know that $ $0\mathrm{.}96$ 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 $9\%,$ 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 $9\%,$ what is your estimate of the value of the new$$ project?

Value of projectequals$$$

$$

enter your response here million$($Round to three decimal$$ places.$)$