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$$ complains, $"$We owe these consultants $ $1\mathrm{.}8$ million for this$$ report, and I am not sure their analysis makes sense. Before we spend the $ $21$ 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

$1$

$2$

$...$

$9$

$10$

Sales revenue

$30\mathrm{.}000$

$30\mathrm{.}000$

$30\mathrm{.}000$

$30\mathrm{.}000$

minusCost of goods sold

$18\mathrm{.}000$

$18\mathrm{.}000$

$18\mathrm{.}000$

$18\mathrm{.}000$

equalsGross profit

$12\mathrm{.}000$

$12\mathrm{.}000$

$12\mathrm{.}000$

$12\mathrm{.}000$

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

$1\mathrm{.}680$

$1\mathrm{.}680$

$1\mathrm{.}680$

$1\mathrm{.}680$

minusDepreciation

$2\mathrm{.}100$

$2\mathrm{.}100$

$2\mathrm{.}100$

$2\mathrm{.}100$

equalsNet operating income

$8\mathrm{.}220$

$8\mathrm{.}220$

$8\mathrm{.}220$

$8\mathrm{.}220$

minusIncome tax

$1\mathrm{.}644$

$1\mathrm{.}644$

$1\mathrm{.}644$

$1\mathrm{.}644$

equalsNet Income

$6\mathrm{.}576$

$6\mathrm{.}576$

$6\mathrm{.}576$

$6\mathrm{.}576$

All of the estimates in the report seem correct. You note that the consultants used$$ straight$-$line depreciation for the new equipment that will be purchased today$($year $0),$ which is what the accounting department recommended. The report concludes that because the project will increase earnings by $ $6\mathrm{.}576$ million per year for $10$ years, the project is worth $ $65\mathrm{.}76$ million. You think back to your halcyon days in finance class and realize there is more work to be$$ done!$$

$$First$,$ you note that the consultants have not factored in the fact that the project will require $ $13$ million in working capital upfront$($year $0),$ which will be fully recovered in year $10.$ Next, you see they have attributed $ $1\mathrm{.}68$ million of$$ selling, general and administrative expenses to the$$ project, but you know that $ $0\mathrm{.}84$ million of this amount is overhead that will be incurred even if the project is not accepted.$$ 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 $14\%,$ what is your estimate of the value of the new$$ 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.$)$