You are a manager at Northem Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.5 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 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): 1 2 10 Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income 25.000 25.000 25.000 25.000 15.000 15.000 15.000 15.000 10.000 10.000 10.000 10.000 2.000 2.000 2.000 2.000 2.500 2.500 2.500 2.500 5.500 5.500 5.500 5.500 - Income tax 1.925 1.925 1.925 1,925 = Net income 3.575 3.575 3.575 3.575 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 for financial reporting purposes. CRA allows a CCA rate of 45% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $3.575 million per year for 10 years, the project is worth $35.75 million. You think back to your glory 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 $8 million in working capital up front (year 0), which will be fully recovered in year 10. Next you see they have attributed S2 million of selling, general and administrative expenses to the project, but you know that $1 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 on! 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?
You are a manager at Northem Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.5 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 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): 1 2 10 Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income 25.000 25.000 25.000 25.000 15.000 15.000 15.000 15.000 10.000 10.000 10.000 10.000 2.000 2.000 2.000 2.000 2.500 2.500 2.500 2.500 5.500 5.500 5.500 5.500 - Income tax 1.925 1.925 1.925 1,925 = Net income 3.575 3.575 3.575 3.575 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 for financial reporting purposes. CRA allows a CCA rate of 45% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $3.575 million per year for 10 years, the project is worth $35.75 million. You think back to your glory 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 $8 million in working capital up front (year 0), which will be fully recovered in year 10. Next you see they have attributed S2 million of selling, general and administrative expenses to the project, but you know that $1 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 on! 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?
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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Question
find the free cash from from year 0 to year 10
Transcribed Image Text:You are a manager at Northem Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.5 million for this report,
and I am not sure their analysis makes sense. Before we spend the $25 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):
1
2
25.000
15.000
9
10
..
25.000
15.000
25.000
15.000
Sales revenue
25.000
- Cost of goods sold
= Gross profit
General, sales, and administrative expenses
- Depreciation
= Net operating income
15.000
10.000
10.000
10.000
10.000
2.000
2.000
2.000
2.000
2.500
2.500
2.500
2.500
5.500
5.500
1.925
5.500
5.500
- Income tax
1.925
1.925
1.925
= Net income
3.575
3.575
3.575
3.575
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 for financial reporting purposes. CRA
allows a CCA rate of 45% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $3.575 million per year for 10 years, the project is worth $35.75 million. You think back to your glory 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 $8 million in working capital up front (year 0), which will be fully recovered in year 10. Next you see they have attributed $2 million of selling, general and administrative
expenses to the project, but you know that $1 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 on!
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?
a. Given the available information, what are the free cash flows in years O through 10 that should be used to evaluate the proposed project?
The free cash flow for year O is $
million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 1 is
million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 2 is f
million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 3 is $
million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 4 is $
million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 5 is:
nillion. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 6 is $ a million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 7 is $
million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 8 is $
million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 9 is $
million. (Round to three decimal places, and enter a decrease as a negative number.)
The free cash flow for year 10 is $
million. (Round to three decimal places, and enter a decrease as a negative number.)
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