You are a manager at Percolated Fiber, which is considering expanding its operations. Your boss said to you We owe these consultants $1.8 million for this report, and all they gave us is Net

Income.

Before we spend $36 million on new equipment needed for this project, look it over and give me your opinion. Here are the reports estimates (in millions of dollars; note that the question is continued below, so you need to scroll down to see it

all):

1 2 3

Sales revenue

64.0

64.0 64.0

- Cost of goods sold

41.0

41.0 41.0

Gross profit

23.0

23.0

23.0

-Selling, gen. & admin. exp. 3.8 3.8 3.8

-Depreciation

12.0

12.0 12.0

Net operating income7.2 7.2 7.2

- Income tax (30%)2.2 2.2 2.2

Net Income

5.0

5.0 5.0

Everything that the consultants have calculated is correct, as far as it goes. The project will require $17 million in working capital upfront (year 0), which will be fully recovered in the last year of the project (year 3).

The project will also utilize other equipment that the consultants did not value separately because the equipment is already owned and not being used in other projects. The equipment could instead be donated to a charity, and the tax benefit of that donation would be $3.3 million (in other words, this is the total amount that your taxes would decrease by in period 0, if you donated the equipment rather than using it for the project). In addition, donating the equipment would generate goodwill and increased reputation which you feel would be worth an additional $0.7 million (in dollars today).

What are the correct free cash flows (FCFs) for evaluating this project?

(a) Start from the correct Net Income which has already been given (do not recopy the calculations before NI).

(b) Make any additional adjustments needed for each relevant period, in order to get the final, complete set of FCFs. Show each of these adjustments, properly labelled (by labels, I mean column and row headings such as "Depreciation" or "Year 3"), Do not explain, only label, using the fewest words possible to simply identify what you are counting

(c) Do not change the units - the answers should be in millions of dollars (as shown), not in dollars.

(d) Do not calculate the NPV just give the final FCF stream.

(e) I'd like your final answer, i.e. the complete set of FCFs, all together - in

bold,

all in one place (preferably at the bottom) and in the same units . The ideal answer will be no more than 9 or 10 lines long, total (in the same column and row format as the earlier part of the problem; don't worry too much about them lining up, as long as I can tell which period the CF occurs in; spaces seem to work better than using tabs).

Last, note that this will show as you having gotten zero points initially, because it will be graded by hand later.