Everything that the consultants have calculated is correct, as far as it goes. The project will require $16 million in working capital upfront (year 0), which will be fully recovered in the last year of the project (year 3). The project will also utilize other equipment that the consultants did not value separately because the equipment is already owned and not being used in other projects. The equipment could instead be donated to a charity. There would be no tax benefit from that donation because the equipment is fully depreciated, but donating the equipment would generate goodwill and increased reputation which you feel would be worth $1.1 million (in dollars today). What are the correct free cash flows (FCFS) for evaluating this project? (a) Start from the correct Net Income which has already been given (do not recopy the calculations before NI). (b) Make any additional adjustments needed for each relevant period, in order to get the final, complete set of FCFS. Show each of these adjustments, properly labelled (by labels, I mean column and row headings such as "Depreciation" or "Year 3"), Do not explain, only label, using the fewest words possible to simply identify what you are counting (c) Do not change the units - the answers should be in millions of dollars (as shown), not in dollars. Do not calculate the NPV - just give the final FCF stream. (d) (e) l'd like your final answer, i.e. the complete set of FCFS, all together in one line, in bold, all in one place (preferably at the bottom) and in the same units (millions of dollars). The ideal answer will be no more than 9 or 10 lines long, total (i the same column and row format as the earlier part of the problem; don't worry too much about them lining up, as long as I can tell which period the CF occurs in: spaces seem to work hetter than uning t
Everything that the consultants have calculated is correct, as far as it goes. The project will require $16 million in working capital upfront (year 0), which will be fully recovered in the last year of the project (year 3). The project will also utilize other equipment that the consultants did not value separately because the equipment is already owned and not being used in other projects. The equipment could instead be donated to a charity. There would be no tax benefit from that donation because the equipment is fully depreciated, but donating the equipment would generate goodwill and increased reputation which you feel would be worth $1.1 million (in dollars today). What are the correct free cash flows (FCFS) for evaluating this project? (a) Start from the correct Net Income which has already been given (do not recopy the calculations before NI). (b) Make any additional adjustments needed for each relevant period, in order to get the final, complete set of FCFS. Show each of these adjustments, properly labelled (by labels, I mean column and row headings such as "Depreciation" or "Year 3"), Do not explain, only label, using the fewest words possible to simply identify what you are counting (c) Do not change the units - the answers should be in millions of dollars (as shown), not in dollars. Do not calculate the NPV - just give the final FCF stream. (d) (e) l'd like your final answer, i.e. the complete set of FCFS, all together in one line, in bold, all in one place (preferably at the bottom) and in the same units (millions of dollars). The ideal answer will be no more than 9 or 10 lines long, total (i the same column and row format as the earlier part of the problem; don't worry too much about them lining up, as long as I can tell which period the CF occurs in: spaces seem to work hetter than uning t
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
Related questions
Question
Transcribed Image Text:You are a manager at Percolated Fiber, which is considering expanding its operations. Your boss said to you "We already owe these consultants $1.8 million for their
first report, and all they gave us is Net Income. Before we spend another $1.4 million on further market research plus $21 million on new equipment needed for this
project, look the first report over and give me your opinion." Here are the report's estimates (in millions of dollars; note that the question is continued below, so you
need to scroll down to see it all):
1
Sales revenue
64.0
64.0
64.0
- Cost of goods sold
Gross profit
-Selling, gen. & admin. exp.
-Depreciation
Net operating income
- Income tax (30%)
Net Income
41.0
41.0
41.0
23.0
23.0
23.0
8.8
8.8
8.8
7.0
7.0
7.0
7.2
7.2
7.2
2.2
2.2
2.2
5.0
5.0
5.0
Transcribed Image Text:Everything that the consultants have calculated is correct, as far as it goes. The project will require $16 million in working capital upfront (year 0), which will be fully
recovered in the last year of the project (year 3).
The project will also utilize other equipment that the consultants did not value separately because the equipment is already owned and not being used in other projects.
The equipment could instead be donated to a charity. There would be no tax benefit from that donation because the equipment is fully depreciated, but donating the
equipment would generate goodwill and increased reputation which you feel would be worth $1.1 million (in dollars today).
What are the correct free cash flows (FCFS) for evaluating this project?
(a) Start from the correct Net Income which has already been given (do not recopy the calculations before NI).
(b) Make any additional adjustments needed for each relevant period, in order to get the final, complete set of FCFS. Show each of these adjustments, properly
labelled (by labels, I mean column and row headings such as "Depreciation" or "Year 3"), Do not explain, only label, using the fewest words possible to simply identify
what you are counting
(c)
Do not change the units - the answers should be in millions of dollars (as shown), not in dollars.
Do not calculate the NPV – just give the final FCF stream.
(d)
(e)
I'd like your final answer, i.e. the complete set of FCFS, all together in one line, in bold, all in one place (preferably at the bottom) and in the same units
(millions of dollars). The ideal answer will be no more than 9 or 10 lines long, total (in the same column and row format as the earlier part of the problem; don't worry
too much about them lining up, as long as I can tell which period the CF occurs in; spaces seem to work better than using tabs).
Last, note that this will show as vIOu b
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