a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate he proposed project? The free cash flow for year 0 is $ number.) million. (Round to three decimal places and enter a decrease as a negative The free cash flow for years 1 to 9 is $ number.) million. (Round to three decimal places and enter a decrease as a negative The free cash flow for year 10 is $ million. (Round to three decimal places and enter a decrease as a negative number.) . If the cost of capital for this project is 11%, what is your estimate of the value of the new project? The value of the project is $ million. (Round to three decimal places.)
a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate he proposed project? The free cash flow for year 0 is $ number.) million. (Round to three decimal places and enter a decrease as a negative The free cash flow for years 1 to 9 is $ number.) million. (Round to three decimal places and enter a decrease as a negative The free cash flow for year 10 is $ million. (Round to three decimal places and enter a decrease as a negative number.) . If the cost of capital for this project is 11%, what is your estimate of the value of the new project? The value of the project is $ million. (Round to three decimal places.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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
$1.4 million for this report, and I am not sure their analysis makes sense. Before we spend the $19 million on new
equipment needed for this project, look it over and give me your opinion." You open the report and find the following
estimates (in millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.)
Earnings Forecast ($ million)
Sales revenue
- Cost of goods sold
= Gross profit
- Selling, general, and administrative expenses
- Depreciation
= Net operating income
- Income tax
= Net unlevered income
Project Year
1
2
34.000
34.000
20.400 20.400
13.600
1.520
1.900
10.180
2.036
8.144
13.600
1.520
1.900
10.180
2.036
8.144
9
34.000
20.400
13.600
1.520
1.900
10.180
2.036
8.144
10
34.000
20.400
13.600
1.520
1.900
10.180
2.036
8.144
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 $8.144 million per year for ten years, the project is worth
$81.44 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 $10 million in working capital
upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed $1.52 million of selling,
general and administrative expenses to the project, but you know that $0.76 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
Transcribed Image Text: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 $ million. (Round to three decimal places and enter a decrease as a negative
number.)
The free cash flow for years 1 to 9 is $
number.)
million. (Round to three decimal places and enter a decrease as a negative
The free cash flow for year 10 is $ million. (Round to three decimal places and enter a decrease as a negative
number.)
b. If the cost of capital for this project is 11%, what is your estimate of the value of the new project?
The value of the project is $
million. (Round to three decimal places.)
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