You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants million for this report, and I am not sure their analysis makes sense. Before we spend the 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):(Click on the following icon in order to copy its contents into a spreadsheet.) Project Year Earnings Forecast ($ million) 1 2 . . . 9 10 Sales revenue Cost of goods sold Gross profit Selling, general, and administrative expenses Depreciation Net operating income Income tax Net unlevered income 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. The report concludes that because the project will increase earnings by million per year for ten years, the project is worth million. You think back to your halcyon 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 million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed million of selling, general and administrative expenses to the project, but you know that 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? b. If the cost of capital for this project is , what is your estimate of the value of the new 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 $ negative 38.000 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for years 1 to 9 is $ 9.940 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for year 10 is $ nothing million. (Round to three decimal places and enter a decrease as a negative number.)
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 o), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $6.640 million per year for ten years, the project is worth $66.4 million. You think back to your halcyon 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 $13 million in working capital upfront (year o), which will be fully recovered in year 10. Next, you see they have attributed $2 million of selling, general and administrative expenses to the project, but you know that $1 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? b. If the cost of capital for this project is 16%, what is your estimate of the value of the new 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 $ - 38.000 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for years 1 to 9 is $ 9.940 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for year 10 is $ million. (Round to three decimal places and enter a decrease as a negative number.) You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.6 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.) 1 9 10 Earnings Forecast ($ million) Sales revenue - Cost of goods sold = Gross profit - Selling, general, and administrative expenses - Depreciation = Net operating income - Income tax 32.000 19.200 12.800 2.000 2.500 8.300 1.66 Project Year 2 32.000 19.200 12.800 2.000 2.500 32.000 19.200 12.800 2.000 2.500 8.300 1.66 32.000 19.200 12.800 2.000 2.500 8.300 1.66 8.300 1.66 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 $ - 38.000 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for years 1 to 9 is $ million. (Round to three decimal places and enter a decrease as a negative number.) 12.800 2.000 2.500 = Gross profit - Selling, general, and administrative expenses - Depreciation = Net operating income - Income tax = Net unlevered income 12.800 2.000 2.500 8.300 1.66 6.640 12.800 2.000 2.500 8.300 1.66 6.640 12.800 2.000 2.500 8.300 1.66 6.640 8.300 1.66 6.640 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 o), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $6.640 million per year for ten years, the project is worth $66.4 million. You think back to your halcyon 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 $13 million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed $2 million of selling, general and administrative expenses to the project, but you know that $1 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? b. If the cost of capital for this project is 16%, what is your estimate of the value of the new 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 $ - 38.000 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for years 1 to 9 is $ million. (Round to three decimal places and enter a decrease as a negative number.) 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 o), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $6.640 million per year for ten years, the project is worth $66.4 million. You think back to your halcyon 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 $13 million in working capital upfront (year o), which will be fully recovered in year 10. Next, you see they have attributed $2 million of selling, general and administrative expenses to the project, but you know that $1 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? b. If the cost of capital for this project is 16%, what is your estimate of the value of the new 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 $ - 38.000 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for years 1 to 9 is $ 9.940 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for year 10 is $ million. (Round to three decimal places and enter a decrease as a negative number.) You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.6 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.) 1 9 10 Earnings Forecast ($ million) Sales revenue - Cost of goods sold = Gross profit - Selling, general, and administrative expenses - Depreciation = Net operating income - Income tax 32.000 19.200 12.800 2.000 2.500 8.300 1.66 Project Year 2 32.000 19.200 12.800 2.000 2.500 32.000 19.200 12.800 2.000 2.500 8.300 1.66 32.000 19.200 12.800 2.000 2.500 8.300 1.66 8.300 1.66 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 $ - 38.000 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for years 1 to 9 is $ million. (Round to three decimal places and enter a decrease as a negative number.) 12.800 2.000 2.500 = Gross profit - Selling, general, and administrative expenses - Depreciation = Net operating income - Income tax = Net unlevered income 12.800 2.000 2.500 8.300 1.66 6.640 12.800 2.000 2.500 8.300 1.66 6.640 12.800 2.000 2.500 8.300 1.66 6.640 8.300 1.66 6.640 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 o), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $6.640 million per year for ten years, the project is worth $66.4 million. You think back to your halcyon 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 $13 million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed $2 million of selling, general and administrative expenses to the project, but you know that $1 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? b. If the cost of capital for this project is 16%, what is your estimate of the value of the new 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 $ - 38.000 million. (Round to three decimal places and enter a decrease as a negative number.) The free cash flow for years 1 to 9 is $ million. (Round to three decimal places and enter a decrease as a negative number.)
