Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $3.25 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $50,000 feasibility study to analyze 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 $11.0 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 $5 million this year (year 0). Once the machine is operating next year, 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 require additional inventory on hand of
$1.7 million, 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$2 million per year.
Accounting: The XC-750 has a CCA rate of 30% and no salvage value is expected. The firm expects receivables from the new sales to be13% of revenues and payables are expected to be 10% of the cost of goods sold. Buckingham's marginal corporate tax rate is 34%.
a. Uetermine the incremental earnings (using C(CA) trom the purchase of the XC(b0 tor years 0 to b : The incremental earnings (including CCA) for year 0 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 1 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 2 is $. (Round to the nearest dollar.) The incremental earnings (including CCA ) for year 3 is $. (Round to the nearest dollar.) The incremental earnings (including CCA ) for year 4 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 5 is $. (Round to the nearest dollar.) Determine the incremental earnings (using CCA) from the purchase of the XC-750 for years 6 to 10: The incremental earnings (including CCA) for year 6 is $ (Round to the nearest dollar.) The incremental earnings (including CCA) for year 7 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 8 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 9 is $. (Round to the nearest dollar.) The incremental earnings (including CCA ) for year 10 is $. (Round to the nearest dollar.) b. Determine the free cash flow from the purchase of the XC750 for years 0 to 5 : The free cash flow for year 0 is S. (Round to the nearest dollar.) The free cash flow for year 1 is S. (Round to the nearest dollar.) The free cash flow for year 2 is S. (Round to the nearest dollar.) The free cash flow for year 3 is S. (Round to the nearest dollar.) The free cash flow for year 4 is S. (Round to the nearest dollar.) The free cash flow for year 5 is S. (Round to the nearest dollar.) Determine the free cash flow from the purchase of the XC-750 for years 6 to 9 : The free cash flow for year 6 is 5 . (Round to the nearest dollar.) The free cash flow for year 7 is S. (Round to the nearest dollar.) The free cash flow for year 8 is S. (Round to the nearest dollar.) The free cash flow for year 9 is S. (Round to the nearest dollar.) Determine the free cash flow from the purchase of the XC-750 for year 10 : The free cash flow for year 10 is $. (Round to the nearest dollar.) Determine the free cash flow from the purchase of the XC- 750 for year 11 . a. Uetermine the incremental earnings (using C(CA) trom the purchase of the XC(b0 tor years 0 to b : The incremental earnings (including CCA) for year 0 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 1 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 2 is $. (Round to the nearest dollar.) The incremental earnings (including CCA ) for year 3 is $. (Round to the nearest dollar.) The incremental earnings (including CCA ) for year 4 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 5 is $. (Round to the nearest dollar.) Determine the incremental earnings (using CCA) from the purchase of the XC-750 for years 6 to 10: The incremental earnings (including CCA) for year 6 is $ (Round to the nearest dollar.) The incremental earnings (including CCA) for year 7 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 8 is $. (Round to the nearest dollar.) The incremental earnings (including CCA) for year 9 is $. (Round to the nearest dollar.) The incremental earnings (including CCA ) for year 10 is $. (Round to the nearest dollar.) b. Determine the free cash flow from the purchase of the XC750 for years 0 to 5 : The free cash flow for year 0 is S. (Round to the nearest dollar.) The free cash flow for year 1 is S. (Round to the nearest dollar.) The free cash flow for year 2 is S. (Round to the nearest dollar.) The free cash flow for year 3 is S. (Round to the nearest dollar.) The free cash flow for year 4 is S. (Round to the nearest dollar.) The free cash flow for year 5 is S. (Round to the nearest dollar.) Determine the free cash flow from the purchase of the XC-750 for years 6 to 9 : The free cash flow for year 6 is 5 . (Round to the nearest dollar.) The free cash flow for year 7 is S. (Round to the nearest dollar.) The free cash flow for year 8 is S. (Round to the nearest dollar.) The free cash flow for year 9 is S. (Round to the nearest dollar.) Determine the free cash flow from the purchase of the XC-750 for year 10 : The free cash flow for year 10 is $. (Round to the nearest dollar.) Determine the free cash flow from the purchase of the XC- 750 for year 11
