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3illingham 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. Jnfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a S50,000 feasibility study to nalyze the decision to buy the XC750, resulting in the following estimates: - Marketing: Once the XC-750 is operating next year, the extra capacity is expected to generate $11 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 \$1 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 will be depreciated via the straight-line method in years 110. 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 XC750. b. Determine the free cash flow from the purchase of the XC750. \begin{tabular}{l|r|} Tax rate & 35.00% \\ Cost of goods as a \% of sales & 70.00% \\ \hline First year sales value & 11,000.00 \\ \cline { 2 } & \end{tabular} Note: Keep all numbers in '000s Net Working Capital Calculation Receivables at 15% Payables at 10% Inventory Net Working Capital Change in NWC b. Free cash flow (FCF) c. Cost of capital PV(FCF) NPV 3illingham 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. Jnfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a S50,000 feasibility study to nalyze the decision to buy the XC750, resulting in the following estimates: - Marketing: Once the XC-750 is operating next year, the extra capacity is expected to generate $11 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 \$1 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 will be depreciated via the straight-line method in years 110. 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 XC750. b. Determine the free cash flow from the purchase of the XC750. \begin{tabular}{l|r|} Tax rate & 35.00% \\ Cost of goods as a \% of sales & 70.00% \\ \hline First year sales value & 11,000.00 \\ \cline { 2 } & \end{tabular} Note: Keep all numbers in '000s Net Working Capital Calculation Receivables at 15% Payables at 10% Inventory Net Working Capital Change in NWC b. Free cash flow (FCF) c. Cost of capital PV(FCF) NPV