Part 1You 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 $1.81.8 million for this report, and I am not sure their analysis makes sense. Before we spend the $2424 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): LOADING... .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. The report concludes that because the project will increase earnings by $6.9706.970 million per year for 10 years, the project is worth $ 69.70$69.70 million. You think back to your halcyon 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 $77 million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed $1.921.92 million of selling, general and administrative expenses to the project, but you know that $0.960.96 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?b. If the cost of capital for this project is 14 %14%, what is your estimate of the value of the new project? Part 1a. 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 $[input]enter your response here million. (Round to three decimal places and enter a decrease as a negative number.)

Question

Part 1You 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 ​$1.81.8 million for this​ report, and I am not sure their analysis makes sense. Before we spend the ​$2424 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): LOADING... .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. The report concludes that because the project will increase earnings by ​$6.9706.970 million per year for 10​ years, the project is worth $ 69.70$69.70 million. You think back to your halcyon 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 ​$77 million in working capital upfront​ (year 0), which will be fully recovered in year 10.​ Next, you see they have attributed ​$1.921.92 million of​ selling, general and administrative expenses to the​ project, but you know that ​$0.960.96 million of this amount is overhead that will be incurred even if the project is not accepted.​ Finally, you know that accounting earnings are not the right thing to focus​ on!a. Given the available​ information, what are the free cash flows in years 0 through 10 that should be used to evaluate the proposed​ project?b. If the cost of capital for this project is 14 %14%​, what is your estimate of the value of the new​ project? Part 1a. Given the available​ information, what are the free cash flows in years 0 through 10 that should be used to evaluate the proposed​ project?The free cash flow for year 0 is ​$[input]enter your response here million. ​ (Round to three decimal places and enter a decrease as a negative​ number.)

BlackTom AI · Accepted Answer

1) Relevant knowledge points and concepts
Incremental free cash flow for year 0 (the initial investment) includes cash expenditures required to start the project: the purchase price of new equipment (capital expenditure) and any initial increase in net working capital (NWC). Sunk costs (past expenditures or fees already incurred or committed regardless of the decision) are not included. Accounting items like depreciation do not directly appear in year-0 cash flow except through their tax effects in operating years.

2) Step-by-step reasoning
- The equipment will be purchased today for $24.0 million. This is a cash outflow at year 0 and must be included.
- The project requires an upfront increase in working capital of $7.0 million, which is a cash outflow at year 0 and must be included.
- The consultants’ fee of $1.8 million has already been incurred (sunk) and should be excluded from the incremental cash flows used to evaluate the project.
- The SG&A overhead adjustment (the $0.96 million unavoidable portion) affects operating-year incremental cash flows, not the initial year-0 cash outlay; it is not part of the year-0 investment calculation.

3) Calculations (all intermediate steps)
Initial equipment cost = -24.000 million
Increase in NWC = -7.000 million
Consultant fee (sunk) = excluded
Total year-0 free cash flow = -24.000 + (-7.000) = -31.000 million

4) Why this answer is correct
Year-0 free cash flow should reflect only cash actually required today to put the project in place. The equipment purchase and the increase in NWC are real cash outflows occurring at year 0, so they are included. The consultant fee is sunk and therefore irrelevant to the decision; including it would distort the evaluation.

5) Why other inclusions would be incorrect
- Including the $1.8 million consultant fee is wrong because it is sunk (already owed/incurred) and not an incremental cash flow.
- Including accounting depreciation is incorrect for year-0 cash flow because depreciation is a noncash accounting expense (its tax effect matters in operating years, not as a cash outlay at time 0).
- Including the $0.96 million unavoidable SG&A in year 0 is incorrect because it is not an incremental cash outflow at initiation (it affects annual operating cash flows).

6) Conclusion
The correct year-0 free cash flow is -31.000 million, which matches the provided answer.

类似问题

Which of the following statements is CORRECT?

Which project do you choose if the following projects are mutually exclusive projects?

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单