You are a manager at Persimmon Production, which is considering adding a new product line. Your boss said to you We already owe these consultants $1.2 million, and all they estimated is Net Income. Before we spend $48 million on new equipment for this project, look the report over and give me your opinion. Here are the reports estimates (in millions of dollars; note that the question is continued below, so you need to scroll down to see it

all):

1 2 3

Sales revenue

77.0

77.0 77.0- Cost of goods sold

42.0

42.0

42.0Gross profit

35.0

35.0

35.0

-Selling, gen. & admin. exp. 4.0 4.0 4.0

-Depreciation

16.0

16.016.0

Net operating income 15.0 15.0 15.0

- Income tax (30%)

4.1

4.1 4.1Net Income

11.0

11.0 11.0

Everything that the consultants have calculated is correct, as far as it goes. The project will require

$27

million in working capital upfront (year 0), which will be fully recovered in the last year of the project (year 3).Unfortunately, some of the benefits of this new product line would be from customers switching from your existing products. This erosion or cannibalization would have a net (after tax) effect of

$6

million per year lost from other products, over the three years you would be producing the new product.

Last, much management time has been spent trying to analyze whether or not this expansion is desirable, and you estimate that the opportunity cost of the analysis that has already been done has been around $0.3 million.

What are the correct free cash flows (FCFs) to be used when evaluating this project? Report them in millions of dollars, not in dollars. Note that the answer is NOT the NPV, but the incremental FCFs needed for each relevant period.

[Note: Please show your work for the possibility of partial credit. Briefly show your calculations but do not explain them except to label the numbers you give. By labels, I mean column and row headings such as "Depreciation" or "Year 2), and make it clear whether you are adding or subtracting I'd prefer that you keep the column/row formatting of the earlier calculations. Do NOT repeat the numbers before Net Income - just show the calculations after that, to get the final FCFs for each period.]

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Part 1

The first relevant period's FCF is:

enter your response here

The second relevant period's FCF is:

enter your response here

The third relevant period's FCF is:

enter your response here

The fourth relevant period's FCF (if any) is: