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 your complains, owe these report, am sure their analysis sense. we spend the $27 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 27.000 27.000 16.200 16.200 10.800 10.800 2.160 2.160 2.700 2.700 5.9400 5.9400 2.079 2.079 3.861 3.861 27.000 16.200 10.800 2.160 2.700 5.9400 -2.079 3.861 10 27.000 16.200 10.800 2.160 2.700 5.9400 2.079 3.861 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 $3.861 million per year for ten years, the project is worth $38.61 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 $2.16 million of selling, general and administrative expenses to the project, but you know that $1.08 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! b. If the cost of capital for this project is 12%, what is your estimate of the value of the new project? b. If the cost of capital for this project is 12%, what is your estimate of the value of the new project? million (Round to three decimal places) Value of project
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 your complains, owe these report, am sure their analysis sense. we spend the $27 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 27.000 27.000 16.200 16.200 10.800 10.800 2.160 2.160 2.700 2.700 5.9400 5.9400 2.079 2.079 3.861 3.861 27.000 16.200 10.800 2.160 2.700 5.9400 -2.079 3.861 10 27.000 16.200 10.800 2.160 2.700 5.9400 2.079 3.861 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 $3.861 million per year for ten years, the project is worth $38.61 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 $2.16 million of selling, general and administrative expenses to the project, but you know that $1.08 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! b. If the cost of capital for this project is 12%, what is your estimate of the value of the new project? b. If the cost of capital for this project is 12%, what is your estimate of the value of the new project? million (Round to three decimal places) Value of 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
Related questions
Question
Please give me answer very fast in 5 min saur
Transcribed Image Text:K
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 $1.4 million for this report, and I am not sure their analysis makes sense. Before we
spend the $27 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
27.000
27.000
16.200 16.200
10.800 10.800
2.160
2.160
2.700 2.700
5.9400 5.9400
2.079
2.079
3.861
3.861
▪▪▪
9
27.000
16.200
10.800
2.160
2.700
5.9400
-2.079
3.861
GITE
10
27.000
16.200
10.800
2.160
2.700
5.9400
2.079
3.861
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 $3.861 million per year for ten years, the project is worth $38.61 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 $2.16 million of selling, general and administrative expenses to the project, but you know that $1.08 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!
b. If the cost of capital for this project is 12%, what is your estimate of the value of the new project?
b. If the cost of capital for this project is 12%, what is your estimate of the value of the new project?
Value of project = $million (Round to three decimal places.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education