= Homework: Chapter 9 Homework Question 10, P 9-33 (simi... Part 1 of 13 HW Score: 91.11%, 10.02 of 11 points Points: 0.02 of 1 Save Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.78 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a S48,000 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 $10.05 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 $5.01 million this year. As with Billingharn's existing products, the cost of goods for the products produced by the XC-750 is expected to be 73% 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 $1.92 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 16% of revenues and payables to be 11% of the cost of goods sold. Billingham's marginal corporate tax rate is 35%. 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. If the appropriate cost of capital for the expansion is 10.4%, compute the NPV of the purchase. d. While the expected new sales will be $10.05 million per year from the expansion, estimates range from $8.10 million to $12.00 million. What is the NPV in the worst case? In the best case? 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 $4.01 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3 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.) Incremental Effects Year 0 Sales Revenues $ $ Cost of Goods Sold S, G, and A Expenses 100 - $ Depreciation EBIT $ $ Taxes at 35% Unlevered Net Income $ e Text Pages Financial Calculator Print Clear All Check Answer = Homework: Chapter 9 Homework Question 10, P 9-33 (simi... Part 1 of 13 HW Score: 91.11%, 10.02 of 11 points Points: 0.02 of 1 Save Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.78 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a S48,000 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 $10.05 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 $5.01 million this year. As with Billingharn's existing products, the cost of goods for the products produced by the XC-750 is expected to be 73% 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 $1.92 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 16% of revenues and payables to be 11% of the cost of goods sold. Billingham's marginal corporate tax rate is 35%. 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. If the appropriate cost of capital for the expansion is 10.4%, compute the NPV of the purchase. d. While the expected new sales will be $10.05 million per year from the expansion, estimates range from $8.10 million to $12.00 million. What is the NPV in the worst case? In the best case? 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 $4.01 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3 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.) Incremental Effects Year 0 Sales Revenues $ $ Cost of Goods Sold S, G, and A Expenses 100 - $ Depreciation EBIT $ $ Taxes at 35% Unlevered Net Income $ e Text Pages Financial Calculator Print Clear All Check
