Bilingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.82 million Unfortunately, Installing this machine will take several months and will partially disrupt production. The firm has just completed a $46,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generato $10.10 million per year in additional sales, which will continue for the 10-year life of the machine. Operations: The disruption caused by the installation will decrease sales by $4.99 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 69% of their sale price. The increased production will also require increased inventory on hand of $1.05 million during the life of the project, including year o Human Resources: The expansion will require additional sales and administrative personnel at a cost of $2.09 million per year. Accounting: The XC-750 will be depreciated via the straight-line method over the 10-year life of the machine. The firm expects receivables from tho now sales to be 16% of revenues and payables to be 10% of the cost of goods sold. Billingham's marginal corporate tax rate is 21% a. Determine the incremental earings from the purchase of the XC-750. b. Determine the free cash flow from the purchase of the XC-750 c. If the aboropriate cost of carital for the expansion in 9.5%.compute the NPV of the purchase 0 1-10 a. Determine the incremental earnings from the purchase of the XC-750 Calculate the incremental earnings from the purchase of the XC-750 below (with vs without XC7750): (Round to the nearest dollar) Incremental Effects (with vs without XC-750) Year Sales Revenues Cost of Goods Sold S. G, and A Expenses Depreciation EBIT $ $ Help me solve this View an example Get more help Clear all Check answer Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.82 million Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $46,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.10 million per year in additional sales, which will continue for the 10-year life of the machine Operations: The disruption caused by the installation will decrease sales by $4.99 million this year. As with Billinghar's existing products, the cost of goods for the products produced by the XC-750 is expected to be 69% of their sale price. The increased production will also require increased inventory on hand of $1.05 million during the life of the project, including year 0. Human Resources: The expansion will require additional sales and administrative personnel at a cost of $2.09 million per year. Accounting: The XC-750 will be depreciated via the straight-line method over the 10-year life of the machine. The firm expects receivables from the new sales to be 16% of revenues and payables to be 10% of the cost of goods sold. Billingham's marginal corporate tax rate is 21% a. Determine the incremental earnings from the purchase of the XC-750 b. Determine the free cash flow from the purchase of the XC-750, c. If the appropriate cost of capital for the expansion is 9.5%, compute the NPV of the purchase d. While the expected new sales will be 510.10 million per year from the expansion, estimates range from $8.15 million to $12.05 million. What is the NPV in the worst case? In the best case? o. What is the break-even level of new sales from the expansion? What is the breakeven level for the cost of goods sold? 1. Billingham could instead purchase the XC-900, which offers oven greater capacity. The cost of the XC-900 is $4.07 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3 through 10. What level of additional sales (above the $10.10 million expected for the XC-750) per year in those years would justify purchasing the larger machine
