Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC - 7 5 0 . The cost of the XC
Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC The cost of the XC is $ million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $ feasibility study to analyze the decision to buy the XC resulting in the following estimates:
Marketing: Once the XC is operating next year, the extra capacity is expected to generate $ million per year in additional sales, which will continue for the year life of the machine.
Operations: The disruption caused by the installation will decrease sales by $ million this year year Once the machine is operating next year, the cost of goods for the products produced by the XC is expected to be of their sale price. The increased production will require additional inventory on hand of $ million, to be added in year and depleted in year
Human Resources: The expansion will require additional sales and administrative personnel at a cost of $ million per year.
Accounting: The XC has a CCA rate of and no salvage value is expected. The firm expects receivables from the new sales to be of revenues and payables are expected to be of the cost of goods sold. Buckingham's marginal corporate tax rate is
c If the appropriate cost of capital for the expansion is compute the NPV of the purchase including all CCA tax shield effectsHint: when calculating the NPV you should calculate the free cash flows excluding CCA tax shields then add the PV CCA tax shields to get the NPV
d While the expected new sales will be $ million per year from the expansion, estimates range from $ to $ What is the NPV in the worst case? In the best case?
c If the appropriate cost of capital for the expansion is compute the NPV of the purchase.
The NPV is $ Round to the nearest dollar.
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