​Persimmon, Inc. is considering a 3 year project. Your boss said to you​ “We owe these consultants​ $1.2 million for this report. Before we spend​ $15 million on new equipment needed for this​ project, look it over and give me your​ opinion.” Here are the​ report’s estimates​ (in millions of​ dollars): ​[BE SURE TO SCROLL DOWN TO SEE THE ENTIRE​ QUESTION.]                                                                                                                                                                                                1                                                                                   2                                                                                   3 Sales revenue                                                                                                          25.0                                                                     25.0                                                                    25.0 ​- Cost of goods sold                                                                          13.0                                                                     13.0                                                                     13.0 Gross profit                                                                                                                          12.0                                                                    12.0                                                                     12.0 ​-Selling, general and administrative expenses                   3.0                                                                       3.0                                                                          3.0 ​-Depreciation                                                                                                                   5.0                                                                      5.0                                                                          5.0 Net operating income                                                                     4.0                                                                       4.0                                                                          4.0 ​- Income tax                                                                                                                        1.0                                                                       1.0                                                                          1.0 Net Income                                                                                                                              3.0                                                                      3.0                                                                          3.0   Everything that the consultants have calculated is​ correct, as far as it goes. This is the incremental net income for this project. Do not change the use of straight line depreciation over three years​ (this is a simplified​ problem). Your job is to determine if there are any further adjustments we need to get the correct incremental FCFs to used in calculating the NPV.   This project will require​ $17 million in working capital upfront​ (year 0), which will be fully recovered in the last year of the project​ (year 3).      What are the correct free cash flows​ (FCFs) for evaluating this​ project?     ​(a) Start from the correct Net Income which has already been given​ (you do NOT need to recopy the calculations before​ NI). ​(b) Make any additional adjustments needed for each of the​ periods, in order to get the entire final set of FCFs. Show each of the adjustments. ​(c) Do not calculate the NPV​ – just give the final FCF stream.

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
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​Persimmon, Inc. is considering a 3 year project. Your boss said to you​ “We owe these consultants​ $1.2 million for this report. Before we spend​ $15 million on new equipment needed for this​ project, look it over and give me your​ opinion.” Here are the​ report’s estimates​ (in millions of​ dollars):
​[BE SURE TO SCROLL DOWN TO SEE THE ENTIRE​ QUESTION.]
                                                                                                                                                                                            
  1
                                                                               
  2
                                                                               
  3
Sales revenue                                                                                                          25.0                                                                     25.0                                                                    25.0
​- Cost of goods sold                                                                          13.0                                                                     13.0                                                                     13.0
Gross profit                                                                                                                          12.0                                                                    12.0                                                                     12.0
​-Selling, general and
administrative expenses    
              3.0
                                                                     
3.0
                                                                        
3.0
​-Depreciation                                                                                                                
  5.0
                                                                    
5.0
                                                                        
5.0
Net operating income                                                                  
  4.0
                                                                     
4.0
                                                                        
4.0
​- Income tax                                                                                                                     
  1.0
                                                                     
1.0
                                                                        
1.0
Net Income                                                                                                                           
  3.0
                                                                    
3.0
                                                                        
3.0
 
Everything that the consultants have calculated is​ correct, as far as it goes. This is the incremental net income for this project. Do not change the use of straight line depreciation over three years​ (this is a simplified​ problem). Your job is to determine if there are any further adjustments we need to get the correct incremental FCFs to used in calculating the NPV.
 
This project will require​ $17 million in working capital upfront​ (year 0), which will be fully recovered in the last year of the project​ (year 3).   
 
What are the correct free cash flows​ (FCFs) for evaluating this​ project?  
 
​(a) Start from the correct Net Income which has already been given​ (you do NOT need to recopy the calculations before​ NI).
​(b) Make any additional adjustments needed for each of the​ periods, in order to get the entire final set of FCFs. Show each of the adjustments.
​(c) Do not calculate the NPV​ – just give the final FCF stream.  
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