You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing Your boss comes into your office, drops aconsultant's report on your desk, and complains, We owe these consultants $1 7million for this report, and I am not sure their analysis makes sense Before we spend the $25million on new equipment needed for this project, look it over and give me your opinion You open the report and find the following estimates (in millions ofdollars) (Click on the Icon located on the top right corner of the data table below in order to copy its contents into a spreadsheet ) Project Year Earnings Forecast ($ million) 1 2 9 10 Sales revenue 32 00032 000 32 00032 000 32 00032 000 32 00032 000 minusCost of goods sold 19 20019 200 19 20019 200 19 20019 200 19 20019 200 equals Gross profit 12 80012 800 12 80012 800 12 80012 800 12 80012 800 minusSelling, general, and administrative expenses 2 0002 000 2 0002 000 2 0002 000 2 0002 000 minusDepreciation 2 5002 500 2 5002 500 2 5002 500 2 5002 500 equals Net operating income 8 3008 300 8 3008 300 8 3008 300 8 3008 300 minusIncome tax 2 9052 905 2 9052 905 2 9052 905 2 9052 905 equals Net unlevered income 5 3955 395 5 3955 395 5 3955 395 5 3955 395 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 $5 395million per year for ten years, the project is worth $53 95million 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 $10million in working capital upfront (year 0), which will be fully recovered in year 10 Next, you see they have attributed $2million of selling, general and administrative expenses to the project, but you know that $1million 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 12 , what is your estimate of the value of the new project Please show work Thanks

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You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops aconsultant's

You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops aconsultant's report on your desk, and complains, "We owe these consultants $1.7million for this report, and I am not sure their analysis makes sense. Before we spend the $25million 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 ofdollars):

(Click on the Icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

	Project Year
Earnings Forecast ($ million)	1	2	. . .	9	10
Sales revenue	32.00032.000	32.00032.000		32.00032.000	32.00032.000
minusCost of goods sold	19.20019.200	19.20019.200		19.20019.200	19.20019.200
equals=Gross profit	12.80012.800	12.80012.800		12.80012.800	12.80012.800
minusSelling, general, and administrative expenses	2.0002.000	2.0002.000		2.0002.000	2.0002.000
minusDepreciation	2.5002.500	2.5002.500		2.5002.500	2.5002.500
equals=Net operating income	8.3008.300	8.3008.300		8.3008.300	8.3008.300
minusIncome tax	2.9052.905	2.9052.905		2.9052.905	2.9052.905
equals=Net unlevered income	5.3955.395	5.3955.395		5.3955.395	5.3955.395

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 $5.395million per year for ten years, the project is worth $53.95million. 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 $10million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed $2million of selling, general and administrative expenses to the project, but you know that $1million 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 12%, what is your estimate of the value of the new project?

Please show work. Thanks!