Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 8, Problem 10P
a.
Summary Introduction
To determine: The
b.
Summary Introduction
To determine: The
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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 $1.5 million for
this report, and I am not sure their analysis makes sense. Before we spend the $15 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
19
10
Sales revenue
25.000
25.000
25.000
25.000
-Cost of goods sold
15.000 15.000
15.000
15.000
= Gross profit
10.000 10.000
10.000
10.000
- General, sales, and administrative expenses
1.200
1.200
1.200
1.200
- Depreciation
1.500 1.500
1.500
1.500
= Net operating income
7.3000
7.3000
7.3000
7.3000
- Income tax
2.555
2.555
2.555
2.555
b. If the cost of capital for this project is 14%, what is your estimate of the value of the new project?
Value of project = $million (Round to three decimal…
You are a manager at Northern Fiber, which is considering expanding its operations in synthetic fiber 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
$29
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):
(Click on the Icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
Project Year
Earnings Forecast ($000,000s)
1
2
. . .
9
10
Sales revenue
25.000
25.000
25.000
25.000
−Cost
of goods sold
15.000
15.000
15.000
15.000
=Gross
profit
10.000
10.000
10.000
10.000
−Selling,
general, and…
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 $20 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
26.000
15.600
2
26.000
15.600
10.400
10.400
1.600 1.600
2.000
2.000
6.800
2.38
4.420
6.800
2.38
4.420
...
9
26.000
15.600
10.400
1.600
2.000
6.800
2.38
4.420
10
26.000
15.600
10.400
1.600
2.000
6.800
2.38
4.420
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new…
Chapter 8 Solutions
Corporate Finance
Ch. 8.1 - How do we forecast unlevered net income?Ch. 8.1 - Prob. 2CCCh. 8.1 - Prob. 3CCCh. 8.2 - Prob. 1CCCh. 8.2 - What is the depreciation tax shield?Ch. 8.3 - Prob. 1CCCh. 8.3 - Prob. 2CCCh. 8.4 - Prob. 1CCCh. 8.4 - What is the continuation or terminal value of a...Ch. 8.5 - Prob. 1CC
Ch. 8.5 - How does scenario analysis differ from sensitivity...Ch. 8 - Pisa Pizza, a seller of frozen pizza is...Ch. 8 - Kokomochi is considering the launch of an...Ch. 8 - Home Builder Supply, a retailer in the home...Ch. 8 - Hyperion, Inc. currently sells its latest...Ch. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Castle View Games would like to invest in a...Ch. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - A bicycle manufacturer currently produces 300,000...Ch. 8 - Prob. 13PCh. 8 - Prob. 14PCh. 8 - Prob. 15PCh. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - Prob. 18PCh. 8 - Prob. 20PCh. 8 - Prob. 21P
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- 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 $1.5 million for this report, and I am not sure their analysis makes sense. Before we spend the $17 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 1 2 28.000 28.000 16.800 16.800 11.200 11.200 1.360 1.360 1.700 1.700 8.1400 8.1400 9 28.000 16.800 11.200 1.360 1.700 8.1400 10 28.000 16.800 11.200 1.360 1.700 8.1400 b. If the cost of capital for this project is 9%, what is your estimate of the value of the new project? Value of project = $ million (Round to three decimal places.)arrow_forwardYou 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 $1.8 million for this report, and I am not sure their analysis makes sense. Before we spend the $19 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 25.000 25.000 15.000 15.000 10.000 10.000 1.520 1.520 1.900 1.900 6.5800 2.303 4.277 6.5800 2.303 4.277 9 25.000 15.000 10.000 1.520 1.900 6.5800 2.303 4.277 10 25.000 15.000 10.000 1.520 1.900 6.5800 2.303 4.277 All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the…arrow_forwardYou 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 $1.8 million for this report, and I am not sure their analysis makes sense. Before we spend the $17 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 30.000 18.000 12.000 1.360 1.700 8.9400 8.9400 3.129 3.129 5.811 5.811 2 30.000 18.000 12.000 1.360 1.700 9 30.000 18.000 12.000 1.360 1.700 8.9400 3.129 5.811 10 30.000 18.000 12.000 1.360 1.700 8.9400 3.129 5.811 b. If the cost of capital for this project is 9%, what is your estimate of the value of the new project? Value of project…arrow_forward
- 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 $1.5 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): Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income - Income tax = Net income 1 33.000 19.800 2 33.000 19.800 13.200 13.200 2.000 2.000 2.500 2.500 8.7000 8.7000 3.045 3.045 5.655 5.655 9 33.000 19.800 13.200 2.000 2.500 8.7000 3.045 5.655 10 33.000 19.800 13.200 2.000 2.500 8.7000 3.045 5.655 All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the…arrow_forwardYou 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 $1.6 million for this report, and I am not sure their analysis makes sense. Before we spend the $29 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 32.000 32.000 19.200 19.200 12.800 12.800 2.320 2.900 2.320 2.900 7.580 7.580 2.653 2.653 4.927 4.927 ... 9 32.000 19.200 12.800 2.320 2.900 7.580 2.653 4.927 10 32.000 19.200 12.800 2.320 2.900 7.580 2.653 4.927 a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the…arrow_forwardYou 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 $1.6 million for this report, and I am not sure their analysis makes sense. Before we spend the $29 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 34.000 34.000 20.400 20.400 13.600 13.600 2.320 2.320 2.900 2.900 8.380 8.380 2.933 2.933 5.447 5.447 9 34.000 20.400 13.600 2.320 2.900 8.380 2.933 5.447 10 34.000 20.400 13.600 2.320 2.900 8.380 2.933 5.447arrow_forward
- 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 $29 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 = 1 33.000 19.800 13.200 2.320 2.900 7.980 2.793 2 33.000 19.800 13.200 2.320 2.900 7.980 2.793 9 33.000 19.800 13.200 2.320 2.900 7.980 2.793 10 33.000 19.800 13.200 2.320 2.900 7.980 2.793 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? The free cash flow for…arrow_forwardYou 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 $26 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 2 1 25.000 25.000 15.000 15.000 10.000 10.000 2.080 2.080 2.600 5.3200 1.862 2.600 5.3200 1.862 3.458 3.458 9 25.000 15.000 10.000 2.080 2.600 5.3200 1.862 3.458 10 25.000 15.000 10.000 2.080 2.600 5.3200 1.862 3.458 All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new…arrow_forwardYou 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 $1.6 million for this report, and I am not sure their analysis makes sense. Before we spend the $26 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 2 1 29.000 29.000 17.400 17.400 11.600 11.600 2.080 2.080 2.600 2.600 6.920 6.920 2.422 2.422 4.498 4.498 10 9 29.000 29.000 17.400 17.400 11.600 11.600 2.080 2.080 2.600 2.600 6.920 2.422 4.498 6.920 2.422 4.498 All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new…arrow_forward
- You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant’s report on your desk, and complains, "We owe these consultants $1 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 million on the new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in thousands of dollars) for the project: Project year 1 2 … 9 10 Sales revenue 30,000 30,000 30,000 30,000 - Cost of goods sold 18,000 18,000 18,000 18,000 =Gross profit 12,000 12,000 12,000 12,000 - Gen, sales and admin expenses 2,000 2,000 2,000 2,000 - Depreciation 2,500 2,500 2,500 2,500 =Net operating income 7,500 7,500 7,500 7,500 - Income tax 2,625 2,625 2,625 2,625 =Net Income…arrow_forwardYou 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 $1.3 million for this report, and I am not sure their analysis makes sense. Before we spend the $24 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): 2 10 Sales revenue 29.000 17.400 29.000 29.000 29.000 - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income 17.400 17.400 17.400 11.600 1.920 2.400 11.600 11.600 11.600 1.920 1.920 1.920 2.400 2.400 2.400 7.2800 7.2800 7.2800 7.2800 - Income tax 2.548 2.548 2.548 2.548 = Net income 4.732 4.732 4.732 4.732 All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new…arrow_forwardYou 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 $23 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 Show Transcribed Text O C 3 1 2 30.000 30.000 18.000 18.000 12.000 12.000 1.840 1.840 2.300 2.300 7.8600 7.8600 2.751 2.751 5.109 5.109 ... 9 30.000 18.000 12.000 1.840 2.300 7.8600 2.751 5.109 10 30.000 18.000 12.000 1.840 2.300 7.8600 2.751 5.109 All of the estimates in the report seem correct. You note that the consultants used…arrow_forward
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