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You are working at Peak Processes, which is considering adding a new product line. You thought that you had estimated the complete FCFs (free cash
You are working at Peak Processes, which is considering adding a new product line. You thought that you had estimated the complete FCFs (free cash flows) to evaluate the continued helow. so voul need to scroll down to see it all): Everything that you have calculated is correct as far as it goes, but you need to decide how, if at all, to adjust for the following factors that your assistant has pointed out. First, the project will utilize other equipment that you did not value separately because the equipment is already owned and not being used in other projects. However, the donated the equipment rather than using it for the project). Or, a second alternative is that the equipment could instead be sold for an after-tax benefit of $6 million (in dollars today). Second, 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 $7 million per year lost from other products, over the two years you would be producing the new product. Last, much management time has been spent trying to analyze whether or not this new product line is desirable, and you estimate that the opportunity cost of the analysis that r already been done has been around $0.7 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: 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 and to clarify the timing.] The first relevant period's FCF is: The second relevant period's FCF is: The third relevant period's FCF, if any, is
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