Solved by Expert Tutors
You are a manager at NorthernFibre, which is considering expanding its operations in synthetic fibre manufacturing.
Solved by Expert Tutors
Question

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 \$ 21 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 )please find the attachment :

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 %

30% on the equipment for tax purposes. The report concludes that because the project will increase earnings by \$ 6.383

million per year for ten​ years, the project is worth \$ 63.83 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 \$ 8 million in working capital up front​ (year 0), which will be fully recovered in year 10. Next you see they have attributed \$ 1.68 million of​ selling, general and administrative expenses to the​ project, but you know that \$ 0.84 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!

b. If the cost of capital for this project is 11 % what is your estimate of the value of the new​ project? Round to three decimal​ places.

, ultrices ac magna. Fusce dui lectus,acinia pulvi

lestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar torto

pulvinar tort lestie consequat, ultric molestie consequat, ultrices ac magna. Fusce dui lectu a molestie consequat, ultrices ac magna. Fusce d fficitur laoreet. Nam risus ante, dapibus a molestie c

### Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

• ### -

Study Documents

Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

Browse Documents