Homework answers / question archive / You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing

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

Finance

Share With

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 owe these consultants $1.7 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 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 1.200 1.500 9.3000 3.255 6.045 2 30.000 18.000 12.000 1.200 1.500 9.3000 3.255 6.045 9 30.000 18.000 12.000 1.200 1.500 9.3000 3.255 6.045 10 30.000 18.000 12.000 1.200 1.500 9.3000 3.255 6.045 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), w recommended for financial reporting purposes. CRA allows a CCA rate of 20% on the equipment for tax purposes. The report concludes that because the project will increa ten years, the project is worth $60.45 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 $7 million in working capital up front (year o), which will be fully recovered in yea $1.2 million of selling, general and administrative expenses to the project, but you know that $0.6 million of this amount is overhead that will be incurred even if the project accounting earnings are not the right thing to focus on! b. If the cost of capital for this project is 11%, what is your estimate of the value of the new project? b. If the cost of capital for this project is 11%, what is your estimate of the value of the new project? Value of project = $ million (Round to three decimal places.)