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 $ $22$ 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

$1\mathrm{.}760$

$1\mathrm{.}760$

$1\mathrm{.}760$

$1\mathrm{.}760$

minusDepreciation

$2\mathrm{.}200$

$2\mathrm{.}200$

$2\mathrm{.}200$

$2\mathrm{.}200$

equalsNet operating income

$8\mathrm{.}440$

$8\mathrm{.}440$

$8\mathrm{.}440$

$8\mathrm{.}440$

minusIncome tax

$2\mathrm{.}954$

$2\mathrm{.}954$

$2\mathrm{.}954$

$2\mathrm{.}954$

equalsNet income

$5\mathrm{.}486$

$5\mathrm{.}486$

$5\mathrm{.}486$

$5\mathrm{.}486$

All of the estimates in the report seem correct. You note that the consultants used$$ straight$-$line depreciation for the new equipment that will be purchased today$($year $0),$ which is what the accounting department recommended for financial reporting purposes. CRA allows a CCA rate of $30\%$ on the equipment for tax purposes. The report concludes that because the project will increase earnings by $ $5\mathrm{.}486$ million per year for $10$ years, the project is worth $ $54\mathrm{.}86$ million. You think back to your glory days in finance class and realize there is more work to be$$ done!$$

First you note that the consultants have not factored in the fact that the project will require $ $9$ million in working capital up front$($year $0),$ which will be fully recovered in year $10.$ Next you see they have attributed $ $1\mathrm{.}76$ million of$$ selling, general and administrative expenses to the$$ project, but you know that $ $0\mathrm{.}88$ 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?

Question content area bottom

Part $1$

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 $$$

$$

enter your response here million. $($Round to three decimal$$ places, and enter a decrease as a negative$$ number.$)$