Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.75 million. Unfortunatcly, installing this machine will take several months and will partially distupt production. The firm has just completed a $50,000 feasibility study to analyre the decision to buy the XC-750, resulting in the following estimates: Marketing: Once the XC-750 is operating next year, the extra capacity is expected to generate $10 million per year in additional sales, which will continue for the ten-year life of the machine Operations: The disruption caused by the installation will decrease sales by SS 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 million during the life of the project. The increased production will require additional inventory of SIM, to be added in year 0 and depleted in year 10. Human Resources: The expansion will require additional sales and administrative personnel at a cost of S2 million per year . Accounting The XC 750 will be depreciated via the straight line method in years 1-10. Receivables are expected to be l 5% of revenues and payables to be 10% of the cost of goods sold. Billingham's marginal corporate tax rate is 35%. . Cost Cy ital: Billingham Packaging believes that the new project ha the ume o st of capital as its eurent ands Orrently, Billingham Packaging is all. equity financed. Its equity beta is 1.4. The risk-free rate is 3%, and the market risk premium is 5%. 16 18 20 a. Determine the incremental carnings from the purchase of the XC-750 b. Determine the free cash flow from the purchase of the XC-750 c. Compute the NP'V of the expansion project Tax rate Cost of goods as % of sales First year sales value 35.00% 70.00% 10,000.00 a. Determine the incremental earnings from the purchase of the XC-75o. b. Determine the free cash flow from the purchase of the XC-750. e. Compute the NPV of the expansion projeet. Tax rate Cost of goods as a % of sales First year sales value 35.00% 70.00% 10,000.00 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Yea Sales revenues Cost of goods sold S, G & A expenses Depreciation EBIT Taxes at 35% a. Unlevered Net Income Depreciation Capital Expenditures Net Working Capital Calculation Receivables at 15% Payables at 10% Inventory Net Working Capital Increase in NWC b. Free cash flow (FCF) c. Cost of capital PV(FCF) NPV