Question
Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $ 2.77 million. Unfortunately,
Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $ 2.77 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $ 50 comma 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 $ 10.20 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 $ 4.95 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 70 % of their sale price. The increased production will also require increased inventory on hand of $ 1.18 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 $ 2.05 million per year. bullet 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 9 % of the cost of goods sold. Billingham's marginal corporate tax rate is 35 %.
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 XC?750):(Round to the nearest dollar.)
b. Determine the free cash flow from the purchase of the XC-750.
c. If the appropriate cost of capital for the expansion is 10.2 %, compute the NPV of the purchase.
d. While the expected new sales will be $ 10.20 million per year from the expansion, estimates range from $ 8.10 million to$ 12.30 million. What is the NPV in the worst case? In the best case?
NPV for $8.1 Million is ______.
NPV for $12.3 Million is ______.
e. What is the break-even level of new sales from the expansion? What is the breakeven level for the cost of goods sold?
f. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $ 3.96 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 $ 10.20 million expected for the XC-750) per year in those years would justify purchasing the larger machine?
Incremental Effects (with vs. without XC-750) Year 0 1 -10 Sales Revenues Cost of Goods Sold S, G, and A Expenses Depreciation EBIT Taxes at 35% Unlevered Net Income Incremental Effects (with vs. without XC-750) Year 0 12-9 1 10 11 Unlevered Net Income Depreciation Capital Expenditures Change in Net Working Capital Free cash flow Incremental Effects (with vs. without XC-750) Year 0 12-9 1 10 11 Unlevered Net Income Depreciation Capital Expenditures Change in Net Working Capital Free cash flow Incremental Effects (with vs. without XC-750) Year 0 1 -10 Sales Revenues Cost of Goods Sold S, G, and A Expenses Depreciation EBIT Taxes at 35% Unlevered Net Income Incremental Effects (with vs. without XC-750) Year 0 12-9 1 10 11 Unlevered Net Income Depreciation Capital Expenditures Change in Net Working Capital Free cash flow Incremental Effects (with vs. without XC-750) Year 0 12-9 1 10 11 Unlevered Net Income Depreciation Capital Expenditures Change in Net Working Capital Free cash flow
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started