Question

You are a manager at Northern 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 $27 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):

Answer 1

From the given limited information the free cashflows from year 0 to 10 can be calculated as shown;

Year	0	1	2	3	4	5	6	7	8	9	10
Investment	-22
Gross Profit		13.6	13.6	13.6	13.6	13.6	13.6	13.6	13.6	13.6	13.6
Minus SG&A expense		1.76	1.76	1.76	1.76	1.76	1.76	1.76	1.76	1.76	1.76
Minus Depreciation		2.2	2.2	2.2	2.2	2.2	2.2	2.2	2.2	2.2	2.2
Profit		9.64	9.64	9.64	9.64	9.64	9.64	9.64	9.64	9.64	9.64
Add depreciation		2.2	2.2	2.2	2.2	2.2	2.2	2.2	2.2	2.2	2.2
Cashflow( investment+profit+depreciation)	-22	11.84	11.84	11.84	11.84	11.84	11.84	11.84	11.84	11.84	11.84

note: if tax is present, we need to find net profit first by reducing tax expense. Then add back depreciation to it to get free cashflows. In the question tax is not given hence it is not used.