You are a manager at Percolated Fiber, which is considering expanding its operations. Your boss said to you "VWe owe these consultants $1.8 million for this repor and all they gave us is Net Income. Before we spend $42 million on new equipment needed for this project, look it over and give me your opinion." Here are the report's estimates (in millions of dollars; note that the question is continued below, so you need to scroll down to see it all): 1 2 Sales revenue Cost of goods sold Gross profit -Selling, gen. & admin. exp. -Depreciation Net operating income - Income tax (30%) 64.0 64.0 39.0 25.0 64.0 39.0 39.0 25.0 25.0 3.8 3.8 3.8 14.0 14.0 7.2 14.0 7.2 7.2 2.2 2.2 2.2 Net Income 5.0 5.0 5.0 Everything that the consultants have calculated is correct, as far as it goes. The project will require $13 million in working capital upfront (year 0), which will be fully
You are a manager at Percolated Fiber, which is considering expanding its operations. Your boss said to you "VWe owe these consultants $1.8 million for this repor and all they gave us is Net Income. Before we spend $42 million on new equipment needed for this project, look it over and give me your opinion." Here are the report's estimates (in millions of dollars; note that the question is continued below, so you need to scroll down to see it all): 1 2 Sales revenue Cost of goods sold Gross profit -Selling, gen. & admin. exp. -Depreciation Net operating income - Income tax (30%) 64.0 64.0 39.0 25.0 64.0 39.0 39.0 25.0 25.0 3.8 3.8 3.8 14.0 14.0 7.2 14.0 7.2 7.2 2.2 2.2 2.2 Net Income 5.0 5.0 5.0 Everything that the consultants have calculated is correct, as far as it goes. The project will require $13 million in working capital upfront (year 0), which will be fully
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
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Question
100%
What are the correct free cash flows for evaluating this project?
Start from the correct net income which has already been given.
Transcribed Image Text:You are a manager at Percolated Fiber, which is considering expanding its operations. Your boss said to you "We owe these consultants $1.8 million for this report,
and all they gave us is Net Income. Before we spend $42 million on new equipment needed for this project, look it over and give me your opinion." Here are the
report's estimates (in millions of dollars; note that the question is continued below, so you need to scroll down to see it all):
1
Sales revenue
64.0
64.0
64.0
39.0
-Cost of goods sold
Gross profit
-Selling, gen. & admiņ. exp.
-Depreciation
Net operating income
- Income tax (30%)
Net Income
39.0
39.0
25.0
25.0
25.0
3.8
3.8
3.8
14.0
14.0
14.0
7.2
7.2
7.2
2.2
2.2
2.2
5.0
5.0
5.0
se
Everything that the consultants have calculated is correct, as far as it goes. The project will require $13 million in working capital upfront (year 0), which will be fully
Transcribed Image Text:Everything that the consultants have calculated is correct, as far as it goes. The project will require $13 million in working capital upfront (year 0), which will be fully
recovered in the last year of the project (year 3).
see scor
The project will also utilize other equipment that the consultants did not value separately because the equipment is already owned and not being used in other projects.
The equipment could instead be donated to a charity, and the tax benefit of that donation would be $0.7 million (in other words, this is the total amount that your taxes
would decrease by in period 0, if you donated the equipment rather than using it for the project). In addition, donating the equipment would generate goodwill and
increased reputation which you feel would be worth an additional $1.3 million (in dollars today).
see score
see score
What are the correct free cash flows (FCFS) for evaluating this project?
(a) Start from the correct Net Income which has already been given (do not recopy the calculations before NI).
(b) Make any additional adjustments needed for each relevant period, in order to get the final, complete set of FCFS. Show each of these adjugtments, properly
labelled (by labels, I mean column and row headings such as "Depreciation" or "Year 3"), Do not explain, only label, using the fewest words possible to simply identify
what you are counting
see score
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