You are a manager at Percolated$$ Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your$$ office, drops a$$ consultant's report on your$$ desk, and$$ complains, $"$We owe these consultants $ $1\mathrm{.}2$ million for this$$ report, and I am not sure their analysis makes sense. Before we spend the $ $20\mathrm{.}3$ 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 Icon located on the$$ top$-$right corner of the data table below in order to copy its information into a spreadsheet.

Project year

Earnings forecast

$1$

$2$

$...$

$9$

$10$

Sales revenue

$25\mathrm{.}000$

$25\mathrm{.}000$

$25\mathrm{.}000$

$25\mathrm{.}000$

minusCost of goods sold

$15\mathrm{.}000$

$15\mathrm{.}000$

$15\mathrm{.}000$

$15\mathrm{.}000$

equalsGross profit

$10\mathrm{.}000$

$10\mathrm{.}000$

$10\mathrm{.}000$

$10\mathrm{.}000$

minus$$General$,$ sales and administrative expenses

$1\mathrm{.}624$

$1\mathrm{.}624$

$1\mathrm{.}624$

$1\mathrm{.}624$

minusDepreciation

$2\mathrm{.}030$

$2\mathrm{.}030$

$2\mathrm{.}030$

$2\mathrm{.}030$

equalsNet operating profit

$6\mathrm{.}346$

$6\mathrm{.}346$

$6\mathrm{.}346$

$6\mathrm{.}346$

minusIncome tax

$1\mathrm{.}904$

$1\mathrm{.}904$

$1\mathrm{.}904$

$1\mathrm{.}904$

equalsNet profit

$4\mathrm{.}442$

$4\mathrm{.}442$

$4\mathrm{.}442$

$4\mathrm{.}442$

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, which is the$$ company's assumption in this case. The report concludes that because the project will increase earnings by $ $4\mathrm{.}442$ million per year for ten$$ years, the project is worth $ $44\mathrm{.}42$ million. You think back to your glory days in finance class and realise there is more work to be$$ done!

$$First$,$ you note that the consultants have not factored in the fact that the project will require $ $11\mathrm{.}6$ million in net working capital up front$($year $0),$ which will be fully recovered in year $10.$ Next, you see they have attributed $ $1\mathrm{.}624$ million of$$ selling, general and administrative expenses to the$$ project, but you know that $ $0\mathrm{.}812$ million of this amount is overhead that will be incurred even if the project is not accepted.$$ Finally, you know that accounting earnings are not the right thing to focus$$ on$!$

a$.$ Given the available$$ information, what are the free cash flows in years $0$ to $10$ that should be used to evaluate the proposed$$ project?

b$.$ If the cost of capital for this project is $11\%,$ what is your estimate of the value of the new$$ project?

Question content area bottom

Part $1$

a$.$ The free cash flow for year $0$ is $$$

$$

enter your response here million.$($Round to three decimal$$ places.$)$

Part $2$

The free cash flow for years $1$ to $9$ is $$$

$$

enter your response here million.$($Round to three decimal$$ places.$)$

Part $3$

The free cash flow for year $10$ is $$$

$$

enter your response here million.$($Round to three decimal$$ places.$)$

Part $4$

b$.$ If the cost of capital for this project is $11\%,$ the value of project is $$$

$$

enter your response here million.$($Round to three decimal$$ places.$)$

Part $5$

You

$$

should

should not

accept the project.$($Choose the best answer from the drop down$$ menu.$)$