Question

In: Accounting

You are a manager at Northern​ Fibre, which is considering expanding its operations in synthetic fibre...

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 $ 1.6million for this​ report, and I am not sure their analysis makes sense. Before we spend the $26million 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

. . .

9

10

Sales revenue

32.000

32.000

32.000

32.000

minus−Cost

of goods sold

19.200

19.200

19.200

19.200

equals=Gross

profit

12.800

12.800

12.800

12.800

minus−​General,

​sales, and administrative expenses

2.080

2.080

2.080

2.080

minus−Depreciation

2.600

2.600

2.600

2.600

equals=Net

operating income

8.120

8.120

8.120

8.120

minus−Income

tax

2.842

2.842

2.842

2.842

equals=Net

income

5.278

5.278

5.278

5.278

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 30% on the equipment for tax purposes. The report concludes that because the project will increase earnings by $5.278 million per year for 10​ years, the project is worth $52.78 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 $15 million in working capital up front​ (year 0), which will be fully recovered in year 10. Next you see they have attributed $2.08 million of​ selling, general and administrative expenses to the​ project, but you know that $1.04 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?

Solutions

Expert Solution


Related Solutions

You are a manager at Northern​ Fibre, which is considering expanding its operations in synthetic fibre...
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 $1.3 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...
You are a manager at Northern​ Fibre, which is considering expanding its operations in synthetic fibre...
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...
You are a manager at Northern​ Fibre, which is considering expanding its operations in synthetic fibre...
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$1.4 million for this​ report, and I am not sure their analysis makes sense. Before we spend the $ 21$21 million on new equipment needed for this​ project, look it over and give me your​ opinion." You open the report and find the...
You are a manager at Northern​ Fibre, which is considering expanding its operations in synthetic fibre...
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 $1.3million for this​ report, and I am not sure their analysis makes sense. Before we spend the $ 27million 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...
You are a manager at Northern​ Fibre, which is considering expanding its operations in synthetic fibre...
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 $1.3 million for this​ report, and I am not sure their analysis makes sense. Before we spend the $18 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​...
You are a manager at Northern​ Fibre, which is considering expanding its operations in synthetic fibre...
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 $ 1.6million for this​ report, and I am not sure their analysis makes sense. Before we spend the $26million 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...
You are a manager at Northern? Fibre, which is considering expanding its operations in synthetic fibre...
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?...
You are a manager at Northern? Fibre, which is considering expanding its operations in synthetic fibre...
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 $1.8 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?...
You are a manager at Northern? Fibre, which is considering expanding its operations in synthetic fibre...
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 $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?...
You are a manager at Northern​ Fibre, which is considering expanding its operations in synthetic fibre...
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 $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​...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT