The cost of the XC750 is $2.74 ming expanding its production capacity by purchasing a new machine, the XC750 partially disrupt p -70 is $2.74 million. Unfortunately, installing this machine will take several months and will the XC-750, resulting in the firm has just completed a $45,000 feasibility study to analyze the decision to buy - Marketing: Once the in the following estimates: per year in addition the XC750 is operational next year, the extra capacity is expected to generate $10.15 million - Operations: The dissales, which will continue for the 10 -year life of the machine. Billingham's existing pruption caused by the installation will decrease sales by $5.07 million this year. As with of their sale price. The increased production.will also require increased inventory on hand of $1.06 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 $2.04 million per year. - Accountina: The XC-750 will be depreciated via the straiaht-line method over the 10-vear life of the machine. The. - Accounting: Ihe XC--150 will be depreciated via the straight-line method over the 10 -year lite of the macrinite. The firm expects receivables from the new sales to be 15% of revenues and payables to be 10% of the cost of goods sold. Billingharn's marginal corporate tax rate is 21%. a. Determine the incremental earnings from the purchase of the XC750. b. Determine the free cash flow from the purchase of the XC-750. c. If the appropriate cost of capital for the expansion is 10.1%, compute the NPV of the purchase. d. While the expected new sales will be $10.15 million per year from the expansion, estimates range from $8.25 million to $12.05 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 $4.07 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3 through 10 . What level of additional sales (above the $10.15 million expected for the XC-750) per year in those years would justify purchasing the larger machine? 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 th nearest dollar.)
