11 0 $5,000 $3,500 Year Sales revenue Cost of goods sold Additional personnel Depreciation Equals net operating income Minus income tax Equals unlevered net income Plus depreciation Capital expenditures Add to NWC Free cash flow 1 $8,000 -S5,600 -$2,000 $275 $125 $19 $106 $275 2 $8,000 -$5,600 -$2,000 $275 $125 $19 $106 3 $8,000 -S5,600 -$2,000 $275 $125 -$19 S106 $275 Free Cash Flows in the Worst Case 4 5 6 7 $8,000 $8,000 $8,000 $8,000 -$5,600 -$5,600 -$5,600 -S5,600 -$2,000 $2,000 -$2,000 -$2,000 $275 $275 $275 $275 $125 $125 $125 $125 -$19 -$19 -$19 -$19 $106 $106 $106 $106 $275 $275 $275 $275 8 $8,000 -S5,600 -$2,000 $275 $125 -$19 S106 $275 9 $8,000 -$5,600 -$2,000 -$275 $125 -S19 $106 S275 10 $8,000 -$5,600 -$2.000 -$275 $125 -$19 $106 $275 -$1,500 $225 -$1,275 $275 $2,750 -$6001 -$4,625 SO SO SO $1,040 -$659 so $381 so $381 $0 $381 SO S381 SO S381 $1,000 $1,381 $640 $640 S381 S381 $381 NPV (000) Net Working Capital Increased receivables Increased payables Increased inventory NWC (000) $1,200 -$560 $0 SO $750 $350 $1,000 $600 $1,200 -$560 $1,000 $1,6401 $1,200 -S560 $1,000 $1,640 $1,200 -S560 $1,000 $1,640 $1,200 -S560 $1,000 $1,640 $1,200 $560 $1,000 $1,640 $1,200 $560 $1,000 $1,640 $1,200 $560 $1,000 $1,640 $1,200 S560 $1,000 $1,640 $1,200 -S560 $1,000 $1,640 $640 $0 e. What is the break-even level of new sales from the expansion? What is the break-even level for the cost of goods sold? Breakeven sales (original assumptions) Breakeven COGS (original assumptions) $10,143 69.55% f. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3-10. What level of additional sales (above the $10 million expected for the XC-750) per year in those years would justify purchasing the larger Machine price (000) $4,000 11 0 $5,000 $3,500 Year Sales revenue Cost of goods sold Additional personnel Depreciation Equals net operating income Minus income tax Equals unlevered net income Plus depreciation Capital expenditures Add to NWC Free cash flow $10,000 -$7,000 -$2,000 -$400 S600 $90 $510 $400 2 $10,000 -$7,000 -S2.000 -S400 S600 S90 $510 S400 3 $10,649 -$7.454 -$2,000 -S400 S795 -S119 S675 S400 4 $10,649 -$7.454 -$2.000 -$400 $795 -$119 $675 $400 5 $10,649 -$ 7,454 -$2,000 -$400 $795 $119 $675 $400 6 6 $10,649 $ 7,454 -$2,000 -$400 $795 $119 $675 $400 7 $10,649| -$7,454 -$2,000 -$400 $795 $119 $675 $400 8 $10,649 -$7,454 -$2,000 -S400 $795 -$119 S675 S400 9 $10,649 $7,454 -$2,000 -$400 S795 S119 S675 S400 10 $10,649 -$7,454 -$2,000 -$400 $795 -$119 $675 $400 $1,500 $225 $1,275 $4,000 -$600 $5,875 $1.200 -$290 SO $910 $ -S52 $1,024 SO $1,075 $o $1,075 $0 $1,075 SO $1,075 SO $1,075 SO $1,075 $1,000 $2,075 $852 $852 NPV (000) Net Working Capital Increased receivables Increased payables Increased inventory NWC (000) $1,597 -$745 SO $0 $750 $350 $1,000 $600 $1,500 -$700 $1,000 $1,800 $1,500 -$7001 $1,000 $1,800 $1,597 -S745 $1,000 $1,852 $1,597 $745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $852 $0 $10,649 Breakeven sales (more expensive machine) Additional sales needed to break even 11 0 $5,000 $3,500 Year Sales revenue Cost of goods sold Additional personnel Depreciation Equals net operating income Minus income tax Equals unlevered net income Plus depreciation Capital expenditures Add to NWC Free cash flow 1 $8,000 -S5,600 -$2,000 $275 $125 $19 $106 $275 2 $8,000 -$5,600 -$2,000 $275 $125 $19 $106 3 $8,000 -S5,600 -$2,000 $275 $125 -$19 S106 $275 Free Cash Flows in the Worst Case 4 5 6 7 $8,000 $8,000 $8,000 $8,000 -$5,600 -$5,600 -$5,600 -S5,600 -$2,000 $2,000 -$2,000 -$2,000 $275 $275 $275 $275 $125 $125 $125 $125 -$19 -$19 -$19 -$19 $106 $106 $106 $106 $275 $275 $275 $275 8 $8,000 -S5,600 -$2,000 $275 $125 -$19 S106 $275 9 $8,000 -$5,600 -$2,000 -$275 $125 -S19 $106 S275 10 $8,000 -$5,600 -$2.000 -$275 $125 -$19 $106 $275 -$1,500 $225 -$1,275 $275 $2,750 -$6001 -$4,625 SO SO SO $1,040 -$659 so $381 so $381 $0 $381 SO S381 SO S381 $1,000 $1,381 $640 $640 S381 S381 $381 NPV (000) Net Working Capital Increased receivables Increased payables Increased inventory NWC (000) $1,200 -$560 $0 SO $750 $350 $1,000 $600 $1,200 -$560 $1,000 $1,6401 $1,200 -S560 $1,000 $1,640 $1,200 -S560 $1,000 $1,640 $1,200 -S560 $1,000 $1,640 $1,200 $560 $1,000 $1,640 $1,200 $560 $1,000 $1,640 $1,200 $560 $1,000 $1,640 $1,200 S560 $1,000 $1,640 $1,200 -S560 $1,000 $1,640 $640 $0 e. What is the break-even level of new sales from the expansion? What is the break-even level for the cost of goods sold? Breakeven sales (original assumptions) Breakeven COGS (original assumptions) $10,143 69.55% f. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3-10. What level of additional sales (above the $10 million expected for the XC-750) per year in those years would justify purchasing the larger Machine price (000) $4,000 11 0 $5,000 $3,500 Year Sales revenue Cost of goods sold Additional personnel Depreciation Equals net operating income Minus income tax Equals unlevered net income Plus depreciation Capital expenditures Add to NWC Free cash flow $10,000 -$7,000 -$2,000 -$400 S600 $90 $510 $400 2 $10,000 -$7,000 -S2.000 -S400 S600 S90 $510 S400 3 $10,649 -$7.454 -$2,000 -S400 S795 -S119 S675 S400 4 $10,649 -$7.454 -$2.000 -$400 $795 -$119 $675 $400 5 $10,649 -$ 7,454 -$2,000 -$400 $795 $119 $675 $400 6 6 $10,649 $ 7,454 -$2,000 -$400 $795 $119 $675 $400 7 $10,649| -$7,454 -$2,000 -$400 $795 $119 $675 $400 8 $10,649 -$7,454 -$2,000 -S400 $795 -$119 S675 S400 9 $10,649 $7,454 -$2,000 -$400 S795 S119 S675 S400 10 $10,649 -$7,454 -$2,000 -$400 $795 -$119 $675 $400 $1,500 $225 $1,275 $4,000 -$600 $5,875 $1.200 -$290 SO $910 $ -S52 $1,024 SO $1,075 $o $1,075 $0 $1,075 SO $1,075 SO $1,075 SO $1,075 $1,000 $2,075 $852 $852 NPV (000) Net Working Capital Increased receivables Increased payables Increased inventory NWC (000) $1,597 -$745 SO $0 $750 $350 $1,000 $600 $1,500 -$700 $1,000 $1,800 $1,500 -$7001 $1,000 $1,800 $1,597 -S745 $1,000 $1,852 $1,597 $745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $1,597 -$745 $1,000 $1,852 $852 $0 $10,649 Breakeven sales (more expensive machine) Additional sales needed to break even