Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.73 million. Unfortunately, installing

image text in transcribed

Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.73 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 $10.00 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 $4.98 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 $1.16 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 $2.03 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 14% of revenues and payables to be 9% of the cost of goods sold. Billingham's marginal corporate tax rate is 21%. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4.09 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 kind of real option does the XC-900 machine provide to Billingham? . What kind of real option does the XC-900 machine provide to Billingham? (Select all the choices that apply.) A. The expansion will require additional sales and administrative personnel. OB. If it would be beneficial to expand production, Billingham will increase production with the XC-900. OC. The XC-900 allows Billingham the option to expand production starting in year 3. D. If it would be better if production remains the same, Billingham is under no obligation to utilize all of the XC-900 production capacity Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.73 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 $10.00 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 $4.98 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 $1.16 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 $2.03 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 14% of revenues and payables to be 9% of the cost of goods sold. Billingham's marginal corporate tax rate is 21%. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4.09 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 kind of real option does the XC-900 machine provide to Billingham? . What kind of real option does the XC-900 machine provide to Billingham? (Select all the choices that apply.) A. The expansion will require additional sales and administrative personnel. OB. If it would be beneficial to expand production, Billingham will increase production with the XC-900. OC. The XC-900 allows Billingham the option to expand production starting in year 3. D. If it would be better if production remains the same, Billingham is under no obligation to utilize all of the XC-900 production capacity

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

A Tiny Book On Personal Finance Saving And Investing Budget Save Invest Retire

Authors: David S. Shekmer

1st Edition

179576385X, 978-1795763851

More Books

Students also viewed these Finance questions

Question

Explain the process of biochemistry

Answered: 1 week ago