Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2 69 million Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $47.000 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 $4.92 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 75% of their sale price. The increased production will also require increased inventory on hand of $1. 17 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 $203 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 10% of revenues and payables to be 9% of the cost of goods sold Billingham's marginal corporate tax rate is 35% - V7 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 10.5%, compute the NPV of the purchase d. While the expected new sales will be $10.10 million per year from the expansion, estimates range from $8.00 million to $12 20 million What is the NPV in the worst case? In the best case? e. 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 even greater capacity. The cost of the XC-900 is $405 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? ISI be useful in the first two years of operation, but would allow for additional sales in years 3 throuyn Tu. That million expected for the XC-750) per year in those years would justify purchasing the larger machine? 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 XC2750) (Round to the nearest dollar) Incremental Effects Year 1-10 Sales Revenues Cost of Goods Sold SG, and A Expenses Depreciation EBIT A ction IIIUI expecieu IU Ie xc- 10 Incremental Effects Year Sales Revenues Cost of Goods Sold S, G, and A Expenses Depreciation EBIT $ s S Taxes at 35% SL TEST Unlevered Net Income Calculate the free cash flow from the purchase of the XC-750 below (with vs without XC7750): (Note: the change in not working capital for year is equal to the sum of the change in accounts receivable due to the decrease in sales, the change in inventory due to the increase in inventory starting in year 0, and the change in accounts payable due to the decrease in cost of goods sold) (Round to the nearest dollar) Incremental Effects Year Unlevered Net Income Depreciation Capital Expenditures Change on Net Working Capital Free cash flow Enter any number in the edit fields and then continue to the next question c. If the appropriate cost of capital for the expansion is 10.5%, compute the NPV of the purchase The NPV of the purchase is $ (Round to the nearest dollar) d. While the expected new sales will be $10 10 million per year from the expansion, estimates range from $8.00 million to $12 20 million. What is the NPV in the worst case? In the best case? The NPV of the purchase for sales of $8.00 million is (Round to the nearest dollar) The NPV of the purchase for sales of $12 20 million is $ (Round to the nearest dollar) e. What is the break-eve level of new sales from the expansion? The break even level of new sales from the expansion is $ (Round to the nearest dollar) Enter any number in the edit fields and then continue to the next question e. What is the break-even level of new sales from the expansion? The break-even level of new sales from the expansion is $ (Round to the nearest dollar) What is the breakeven love for the cost of goods sold? The breakeven level for the cost of goods sold is % of sales (Round to two decimal places) 1. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $405 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? The additional sales would need to be $ (Round to the nearest dollar)
