You are a manager at Northern Fibre, which is considering expanding its operations in synthetic bre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.3 million for this report, and I am not sure their analysis makes sense. Before we spend the $18 million on new equipment needed for this project, look it over and give me your opinion." You open the report and nd the following estimates (in millions of dollars): 1 2 . . . 9 10 Sales revenue 28.000 28.000 28.000 28.000 - Cost of goods sold 16.800 16.800 16.800 16.800 = Gross prot 11.200 11.200 11.200 11.200 - General, sales, and administrative expenses 1.440 1.440 1.440 1.440 - Depreciation 1.800 1.800 1.800 1.800 = Net operating income 7.960 7.960 7.960 7.960 Income tax 2.786 2.786 2.786 2.786 E) a. Given the available information, what are the free cash ows in years 0 through 10 that should be used to evaluate the proposed project? The free cash ow for year 0 is $|:| million. (Round to three decimal places, and enter a decrease as a negative number.) You are a manager at Northern Fibre, which is considering expanding its operations in synthetic bre manufacturing. Your boss comes into your ofce, drops a consultant's report on your desk, and complains, "We owe these consultants $1.1 million for this report, and I am not sure their analysis makes sense. Before we spend the $17 million on new equipment needed for this project, look it over and give me your opinion.\" You open the report and nd the following estimates (in millions of dollars): 1 2 . . . 9 1 0 Sales revenue 26.000 26.000 26.000 26.000 - Cost of goods sold 15.600 15.600 15.600 15.600 = Gross prot 10.400 10.400 10.400 10.400 - General, sales. and administrative expenses 1.360 1.360 1.360 1.360 - Depreciation 1.700 1.700 1.700 1.700 = Net operating income 7.3400 7.3400 7.3400 7.3400 - Income tax 2.569 2.569 2.569 2.569 E> b. If the cost of capital for this project is 8%, what is your estimate of the value of the new project? Value of project = $D million (Round to three decimal places.) Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incomplete incremental free cash ow projections (in millions of dollars): Free Cash Flow ($000,0005) Year 0 Years 19 Year 10 Revenues 117.00 117.00 Manufacturing expenses (other than depreciation) - 34.00 - 34.00 Marketing expenses - 8.00 - 8.00 - CCA ? ? = EBIT 7 7 Taxes (35%) 7 7 = Unlevered net income 7 7 + CCA 7 9 E> Using the indirect method requires a separate calculation of the CCA tax shield. What is the present value of the CCA tax shield? The present value of the CCA tax shield is $D million. (Round to two decimal places.) Why must real options have positive value? E> (Select all the choices that apply.) [:1 A. Real options must have positive value because they are only exercised when doing so would increase the value of the investment. [:1 B. If exercising the real option would reduce value, managers can allow the option to go unexercised. [:1 c. Having the real option but not the obligation to act is valuable. [:1 D. Real options must have positive value because they can always be sold to recover the initial investment. Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.67 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The rm has just completed a $47,000 feasibility study to analyze the decision to buy the XC750, resulting in the following estimates: Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.10 million per year in additional sales. which will continue for the 10-year life of the machine. ' Operations: The disruption caused by the installation will decrease sales by $4.93 million this year. As with Buckingham's existing products, the cost of goods for the products produced by the XC750 is expected to be 73% of their sale price. The increased production will also require increased inventory on hand of $1.03 million during the life of the project, including year 0. Human Resources: The expansion will require additional sales and administrative personnel at a cost of $1.94 million per yeah <:> What kind of real option does the XC900 machine provide to Buckingham? Select all that apply. 1:] A. The XC900 allows Buckingham the option to expand production starting in year 3. 1:] B. The expansion will require additional sales and administrative personnel. 1:] C. If it would be benecial to expand production, Buckingham will increase production with the XC-900. 1:] D. If it would be better if production remains the same, Buckingham is under no obligation to utilize all of the XC-900 production capacity