You are a manager at Northern 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 $1.1 million for this report, and I am not sure their analysis makes sense. Before we spend the $16 million on new equipment needed for this project, look it over and give meyour opinion." You open the report and find the following estimates (in millions of dollars):Sales revenue- Cost of goods sold= Gross profit- General, sales, and administrative expenses- Depreciation= Net operating income- Income tax= Net income129.00017.400229.00017.40011.60011.6001.2801.2801.600 1.6008.72003.0525.6688.72003.0525.668929.00017.40011.6001.2801.6008.72003.0525.6681029.00017.40011.6001.2801.6008.72003.0525.668All 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 departmentrecommended for financial reporting purposes. CRA allows a CCA rate of 20% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $5.668 million per yearfor ten years, the project is worth $56.68 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 $7 million in working capital up front (year 0), which will be fully recovered in year 10. Next you see they have attributed$1.28 million of selling, general and administrative expenses to the project, but you know that $0.64 million of this amount is overhead that will be incurred even if the project is not accepted. Finally, you know thataccounting earnings are not the right thing to focus on!b. If the cost of capital for this project is 14%, what is your estimate of the value of the new project? b. If the cost of capital for this project is 14%, what is your estimate of the value of the new project?

Here,Cost of Project is $16 millionsNet Income of Project is $5.668 millionDepreciation is 1.600…

You are a manager at Northern 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 $1.1 million for this report, and I am not sure their analysis makes sense. Before we spend the $16 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): Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation Net operating income - Income tax = Net income 1 2 29.000 29.000 17.400 17.400 11.600 11.600 1.280 1.600 1.600 1.280 8.7200 8.7200 3.052 3.052 5.668 5.668 9 29.000 17.400 11.600 1.280 1.600 8.7200 3.052 5.668 10 29.000 17.400 11.600 1.280 1.600 8.7200 3.052 5.668 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 ecommended for financial reporting purposes. CRA allows a CCA rate of 20% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $5.668 million per yea or ten years, the project is worth $56.68 million. You think back to your glory days in finance class and realize there is more work to be donel First you note that the consultants have not factored in the fact that the project will require $7 million in working capital up front (year 0), which will be fully recovered in year 10. Next you see they have attributed $1.28 million of selling, general and administrative expenses to the project, but you know that $0.64 million of this amount is overhead that will be incurred even if the project is not accepted. Finally, you know th accounting earnings are not the right thing to focus on! . If the cost of capital for this project is 14%, what is your estimate of the value of the new project?