You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibremanufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "Weowe these consultants $1.5 million for this report, and I am not sure their analysis makes sense. Before we spendthe $17 million on new equipment needed for this project, look it over and give me your opinion." You open thereport 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 income1228.00028.00016.80016.80011.20011.2001.3601.3601.700 1.7008.14008.1400928.00016.80011.2001.3601.7008.14001028.00016.80011.2001.3601.7008.1400b. If the cost of capital for this project is 9%, what is your estimate of the value of the new project?Value of project = $ million (Round to three decimal places.)

The value of a project can be determined using the discounted cash flow method. This helps to…

Answered: You are a manager at Northern Fibre,…

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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You 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 $1.2 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 (in millions of dollars): 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 $6.864 million per year for ten years, the project is worth $68.64 million. You think back to your halcyon days in finance class and realize there is more work to be done! First,…
You 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 $1.9 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 (in millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.) Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income - Income tax 1 34.000 20.400 13.600 1.440 1.800 10.360 2.072 Project Year 2 34.000 20.400 13.600 1.440 1.800 10.360 2.072 9 34.000 20.400 13.600 1.440 1.800 10.360 2.072 10 34.000 20.400 13.600 1.440 1.800 10.360 2.072 a. Given the available information, what are the free cash…
You 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 $1.2 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 millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.) Project Year Sales revenue Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income - Income tax 1 25.000 15.000 10.000 2.320 2.900 4.780 1.434 2 25.000 15.000 10.000 2.320 2.900 4.780 1.434 9 25.000 15.000 10.000 2.320 2.900 4.780 1.434 10 25.000 15.000 10.000 2.320 2.900 4.780 1.434 a. Given the available information, what are the free cash flows in…
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 (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 2 35.000 35.000 21.000 21.000 14.000 14.000 1.440 1.440 1.800 1.800 10.760 10.760 3.766 3.766 6.994 6.994 9 35.000 21.000 14.000 1.440 1.800 10.760 3.766 6.994 10 35.000 21.000 14.000 1.440 1.800 10.760 3.766 6.994 All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the…
You 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 $1.7 million for this report, and I am not sure their analysis makes sense. Before we spend the $28.3 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 1 2 9 10 Sales Revenue 30.000 30.000 30.000 30.000 Cost of Goods Sold 18.000 18.000 18.000 18.000 - = Gross Profit 12.000 12.000 12.000 12.000 - General, Sales and Administrative Expenses - Depreciation 2.264 2.264 2.264 2.264 2.830 2.830 2.830 2.830 = Net Operating Income 6.906 6.906 6.906 6.906 - Income Tax 2.417 2.417 2.417 2.417 = Net Income 4.489 4.489 4.489 4.489 ... a. Given the available information, what are the free cash flows in years 0 through 10…
You 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 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 million on the new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in thousands of dollars) for the project: Project year 1 2 … 9 10 Sales revenue 30,000 30,000 30,000 30,000 - Cost of goods sold 18,000 18,000 18,000 18,000 =Gross profit 12,000 12,000 12,000 12,000 - Gen, sales and admin expenses 2,000 2,000 2,000 2,000 - Depreciation 2,500 2,500 2,500 2,500 =Net operating income 7,500 7,500 7,500 7,500 - Income tax 2,625 2,625 2,625 2,625 =Net Income…
You 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 $ 1.1 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 millions of dollars): Project Year Earnings Forecast ($ million) 1 2 . . . 9 10 Sales revenue 28.00028.000 28.00028.000 28.00028.000 28.00028.000 minus−Cost of goods sold 16.80016.800 16.80016.800 16.80016.800 16.80016.800 equals=Gross profit 11.20011.200 11.20011.200 11.20011.200 11.20011.200 minus−Selling, general, and administrative expenses 2.3202.320 2.3202.320 2.3202.320 2.3202.320…
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 $1.6 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 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 2 34.000 34.000 20.400 20.400 13.600 13.600 2.320 2.320 2.900 2.900 8.380 8.380 2.933 2.933 5.447 5.447 9 34.000 20.400 13.600 2.320 2.900 8.380 2.933 5.447 10 34.000 20.400 13.600 2.320 2.900 8.380 2.933 5.447
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 (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 1.360 1.700 8.9400 8.9400 3.129 3.129 5.811 5.811 2 30.000 18.000 12.000 1.360 1.700 9 30.000 18.000 12.000 1.360 1.700 8.9400 3.129 5.811 10 30.000 18.000 12.000 1.360 1.700 8.9400 3.129 5.811 b. If the cost of capital for this project is 9%, what is your estimate of the value of the new project? Value of project…
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 $1.6 million for this report, and I am not sure their analysis makes sense. Before we spend the $16 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): Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income Income tax = Net income 1 2 35.000 35.000 21.000 21.000 14.000 14.000 1.280 1.280 1.600 1.600 11.1200 11.1200 3.892 3.892 7.228 7.228 9 35.000 21.000 14.000 1.280 1.600 11.1200 3.892 7.228 10 35.000 21.000 14.000 1.280 1.600 11.1200 3.892 7.228 All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the…
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 $1.6 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 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 2 32.000 32.000 19.200 19.200 12.800 12.800 2.320 2.900 2.320 2.900 7.580 7.580 2.653 2.653 4.927 4.927 ... 9 32.000 19.200 12.800 2.320 2.900 7.580 2.653 4.927 10 32.000 19.200 12.800 2.320 2.900 7.580 2.653 4.927 a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the…
You 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 $1.4 million for this report, and I am not sure their analysis makes sense. Before we spend the $28 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): (Click on the following icon in order to copy its contents into a spreadsheet.) Project Year Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income - Income tax 1 31.000 18.600 12.400 2.240 2.800 7.360 1.472 2 31.000 18.600 12.400 2.240 2.800 7.360 1.472 9 31.000 18.600 12.400 2.240 2.800 7.360 1.472 10 31.000 18.600 12.400 2.240 2.800 7.360 1.472 a. Given the available information, what are the free cash flows…

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