Question

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 $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):

	Project Year
Earnings Forecast? ($000,000s)	1	2	. . .	9	10
Sales revenue	27.000	27.000		27.000	27.000
?Cost of goods sold	16.200	16.200		16.200	16.200
=Gross profit	10.800	10.800		10.800	10.800
??General, sales, and administrative expenses	1.840	1.840		1.840	1.840
?Depreciation	2.300	2.300		2.300	2.300
=Net operating income	6.6600	6.6600		6.6600	6.6600
?Income tax	2.331	2.331		2.331	2.331
=Net income	4.329	4.329		4.329	4.329

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. Canada Revenue Agency allows a CCA rate of 45% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $4.329 million per year for ten? years, the project is worth $43.29 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 $14 million in working capital up front? (year 0), which will be fully recovered in year 10.? Next, you see they have attributed $1.84 million of? selling, general and administrative expenses to the? project, but you know that $0.92 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.

The free cash flow for year 0 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 --- 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 --- million. ?(Round to three decimal places and enter a decrease as a negative? number.)

The free cash flow for year 6 is --- 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.)

Answer 1

Tax rate	35%
	Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8	Year-9	Year-10
Sale Revenue	27,000,000	27,000,000	27,000,000	27,000,000	27,000,000	27,000,000	27,000,000	27,000,000	27,000,000	27,000,000
less variable cost	16,200,000	16,200,000	16,200,000	16,200,000	16,200,000	16,200,000	16,200,000	16,200,000	16,200,000	16,200,000
Increamental revenue	10,800,000	10,800,000	10,800,000	10,800,000	10,800,000	10,800,000	10,800,000	10,800,000	10,800,000	10,800,000
Less: Fixed Cost	920,000	920,000	920,000	920,000	920,000	920,000	920,000	920,000	920,000	920,000
Less: Depreciation as per table given below	10,350,000	5,692,500	3,130,875	1,721,981	947,090	520,899	286,495	157,572	86,665	47,666
Profit before tax	(470,000)	4,187,500	6,749,125	8,158,019	8,932,910	9,359,101	9,593,505	9,722,428	9,793,335	9,832,334
Tax	(164,500)	1,465,625	2,362,194	2,855,307	3,126,519	3,275,685	3,357,727	3,402,850	3,427,667	3,441,317
Profit After Tax	(305,500)	2,721,875	4,386,931	5,302,712	5,806,392	6,083,415	6,235,778	6,319,578	6,365,668	6,391,017
Add Depreciation	10,350,000	5,692,500	3,130,875	1,721,981	947,090	520,899	286,495	157,572	86,665	47,666
Cash Profit After tax	10,044,500	8,414,375	7,517,806	7,024,693	6,753,481	6,604,315	6,522,273	6,477,150	6,452,333	6,438,683
		New Machine
Cost of macine		23,000,000
Depreciation		22,941,742
WDV		58,258
Sale price		-
Profit/(Loss)		(58,258)
Tax @ 0.35		(20,390)
Sale price after tax		20,390
Depreciation on New
Depreciation	Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8	Year-9	Year-10	Total Depreciation
WDV	23,000,000	12,650,000	6,957,500	3,826,625	2,104,644	1,157,554	636,655	350,160	192,588	105,923
Dep Rate	45.00%	45.00%	45.00%	45.00%	45.00%	45.00%	45.00%	45.00%	45.00%	45.00%
Deprecaition	10,350,000	5,692,500	3,130,875	1,721,981	947,090	520,899	286,495	157,572	86,665	47,666	22,941,742
Calculation of tax rate
Net income	6,660,000
Tax	2,331,000
Tax rate=	2331000/6660000
Tax rate=	35.00%
Calculation of NPV
Year	Captial	Working Capital	Operating cash	Annual Cash flow
0	(23,000,000)	(14,000,000)		(37,000,000)
1			10,044,500	10,044,500
2			8,414,375	8,414,375
3			7,517,806	7,517,806
4			7,024,693	7,024,693
5			6,753,481	6,753,481
6			6,604,315	6,604,315
7			6,522,273	6,522,273
8			6,477,150	6,477,150
9			6,452,333	6,452,333
10	20,390	14,000,000	6,438,683	20,459,073