I believe my answers are right so far, but am not sure. Will give good rating, Thanks!
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. Unfortunately, installing this machine will take several months and will partially disrupt production. The fim 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 $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 $5 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 require additional inventory of S1 million, to be added in year 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 15% of revenues and payables to be 10% of the cost of goods sold. Billingham's marginal corporate tax rate is 35%. Cost of Capital: Billingham Packaging believes that the new project has the same cost of capital as its current assets. Currently, 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% a. Determine the incremental earnings from the purchase of the XC-750. b. Determine the free cash flow from the purchase of the XC-750. c. Compute the NPV of the expansion project. Tax rate Cost of goods as a % of sales First year sales value 35.00% 70.00% 10,000.00 Note: Keep all numbers in '000s 0 1 4 6 9 7 10,000 5,000 2 10,000 7000 2000 3 10,000 7000 10,000 7000 2000 10,000 7000 10 10,000 7000 11 10,000 7000 3500 7000 2000 2000 8 10,000 7000 2000 275 725 10,000 7000 2000 275 7251 253.75 2000 5 10,000 70001 2000 275 725 253.75 471.25 275 275 10,000 7000 2000 275 725 253.75 471.25 275 275 2000 275 725 275 725 253.75 1,500 525 975.00 725 725 253.75 275 725 253.75 253.75 253.75 471.25 725 253.75 471.25 253.75 471.25 471.25 471.25 471.25 471.25 471.25 275 275 275 275 275 275 275 275 275 2750 Year 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 1500 1500 1500 15001 750 350 1,000 1500 700 1.000 1500 700 1,000 1500 700 700 700 700 700 1500 700 1,000 1,800 1500 700 1,000 1,800 1500 700 1,000 1,800 1,000 1,8001 1,000 1,800 1,000 1,800 1,000 1,800 0 800 600 1,800 1,800 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. Unfortunately, installing this machine will take several months and will partially disrupt production. The fim 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 $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 $5 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 require additional inventory of S1 million, to be added in year 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 15% of revenues and payables to be 10% of the cost of goods sold. Billingham's marginal corporate tax rate is 35%. Cost of Capital: Billingham Packaging believes that the new project has the same cost of capital as its current assets. Currently, 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% a. Determine the incremental earnings from the purchase of the XC-750. b. Determine the free cash flow from the purchase of the XC-750. c. Compute the NPV of the expansion project. Tax rate Cost of goods as a % of sales First year sales value 35.00% 70.00% 10,000.00 Note: Keep all numbers in '000s 0 1 4 6 9 7 10,000 5,000 2 10,000 7000 2000 3 10,000 7000 10,000 7000 2000 10,000 7000 10 10,000 7000 11 10,000 7000 3500 7000 2000 2000 8 10,000 7000 2000 275 725 10,000 7000 2000 275 7251 253.75 2000 5 10,000 70001 2000 275 725 253.75 471.25 275 275 10,000 7000 2000 275 725 253.75 471.25 275 275 2000 275 725 275 725 253.75 1,500 525 975.00 725 725 253.75 275 725 253.75 253.75 253.75 471.25 725 253.75 471.25 253.75 471.25 471.25 471.25 471.25 471.25 471.25 275 275 275 275 275 275 275 275 275 2750 Year 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 1500 1500 1500 15001 750 350 1,000 1500 700 1.000 1500 700 1,000 1500 700 700 700 700 700 1500 700 1,000 1,800 1500 700 1,000 1,800 1500 700 1,000 1,800 1,000 1,8001 1,000 1,800 1,000 1,800 1,000 1,800 0 800 600 1,800 1,800
