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 $1.5 million for this report, and I am not sure their analysis makes sense. Before we spend the $16.6 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):

Project Year

Earnings Forecast

1

2

. . .

9

10

Sales Revenue

29.000

29.000

29.000

29.000

Cost of Goods Sold

17.400

17.400

17.400

17.400

=Gross Profit

11.600

11.600

11.600

11.600

General, Sales and Administrative Expenses

1.328

1.328

1.328

1.328

Depreciation

1.660

1.660

1.660

1.660

=Net Operating Income

8.612

8.612

8.612

8.612

Income Tax

3.014

3.014

3.014

3.014

=Net Income

5.598

5.598

5.598

5.598

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. They also calculated the depreciation assuming no salvage value for the equipment. The report concludes that because the project will increase earnings by $5.598 million per year for 10 years, the project is worth $55.98 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 included the fact that the project will require $11.6 million in working capital up front (year 0), which will be fully recovered in year 10. Next, you see they have attributed $1.328 million of selling, general, and administrative expenses to the project, but you know that $0.664 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 10%, 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 $nothing million.(Round to three decimal places.)

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 $15 million for this report, and I am not sure their analysis makes sense. Before we spend the $16.6 milion 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 Project Year Earnings Forecast 1 2 9 10 Sales Revenue 29.000 29.000 20000 29.000 - Cost of Goods Sold 17.400 17.400 17.400 17.400 Gross Prof 11 600 - General Sales and Administrative Expenses 1.326 1.328 -Depreciation 1.600 1.660 1.600 Net Operating income -Income Tax 3.014 3.014 3014 a. Given the available information, what are the free cash flows in years through 10 that should be used to evaluate the proposed project? The free cash flow for year is million (Round to three decimal places) 0612 8612 3014