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 $$1\mathrm{.}5$ million for this report, and I am not sure their analysis makes sense. Before we spend the $$27$ 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$)$:

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

$$4\mathrm{.}381$ million per year for $10$ years, the project is worth $$43\mathrm{.}81$ 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 $$7$ million in working capital up front $($year $0),$ which will be fully recovered in year $10.$ Next you see they have

attributed $$2\mathrm{.}16$ million of selling, general and administrative expenses to the project, but you know that $$1\mathrm{.}08$ 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 $0$ is $ million. $($Round to three decimal places, and enter a decrease as a negative number.$)$ You are a manager at Northern$$ Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your$$ 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 $ $27$ 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

$29\mathrm{.}000$

$29\mathrm{.}000$

$29\mathrm{.}000$

$29\mathrm{.}000$

minusCost of goods sold

$17\mathrm{.}400$

$17\mathrm{.}400$

$17\mathrm{.}400$

$17\mathrm{.}400$

equalsGross profit

$11\mathrm{.}600$

$11\mathrm{.}600$

$11\mathrm{.}600$

$11\mathrm{.}600$

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

$2\mathrm{.}160$

$2\mathrm{.}160$

$2\mathrm{.}160$

$2\mathrm{.}160$

minusDepreciation

$2\mathrm{.}700$

$2\mathrm{.}700$

$2\mathrm{.}700$

$2\mathrm{.}700$

equalsNet operating income

$6\mathrm{.}740$

$6\mathrm{.}740$

$6\mathrm{.}740$

$6\mathrm{.}740$

minusIncome tax

$2\mathrm{.}359$

$2\mathrm{.}359$

$2\mathrm{.}359$

$2\mathrm{.}359$

equalsNet income

$4\mathrm{.}381$

$4\mathrm{.}381$

$4\mathrm{.}381$

$4\mathrm{.}381$

All of the estimates in the report seem correct. You note that the consultants used$$ straight$-$line depreciation for the new equipment that will be purchased today$($year $0),$ which is what the accounting department recommended for financial reporting purposes. CRA allows a CCA rate of $30\%$ on the equipment for tax purposes. The report concludes that because the project will increase earnings by $ $4\mathrm{.}381$ million per year for $10$ years, the project is worth $ $43\mathrm{.}81$ million. You think back to your glory days in finance class and realize there is more work to be$$ done!$$

First you note that the consultants have not factored in the fact that the project will require $ $7$ million in working capital up front$($year $0),$ which will be fully recovered in year $10.$ Next you see they have attributed $ $2\mathrm{.}16$ million of$$ selling, general and administrative expenses to the$$ project, but you know that $ $1\mathrm{.}08$ 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?