What is cost of capital? Please show work and ill 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 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 expected 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 $1 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 $2 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 4 9 10 11 5,000 3500 2 10,000 -70001 -2000 -275 1 10,000 -7000 -2000 -275 725 -253.75 10,000 -7000 3 10,000 -7000 -2000 275 725 10,000 -7000 -2000 -275 725 5 10,000 -7000 -2000 -275 725 -253.75 471.25 2751 7 10,0001 -7000 -2000 275 6 10,000 -7000 -2000 -275 725 -253.75 471.25 275 2000 8 10,000 -7000 -2000 -275 725 10,000 -7000 -2000 275 725 -253.75 471.25 275 725 725 -1,500 525 975.00 -253.75 -253.75 -253.75 -253.75 -253.75 471.25 275 -275 725 -253.75 471.25 275 471.25 2751 471.25 275 471.25 275 471.25 275 471.25 275 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 -2750 15001 -700 1,000! 15001 -700 -7501 350 1,000 600 -600 4,325.00 0 15001 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 0 0 746.25 1500 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 ol 746.25 1500 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 0 1,800 800 1,000 1,746.25 -1,200 -453.75 800 746.25 800.00 ??? 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 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 expected 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 $1 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 $2 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 4 9 10 11 5,000 3500 2 10,000 -70001 -2000 -275 1 10,000 -7000 -2000 -275 725 -253.75 10,000 -7000 3 10,000 -7000 -2000 275 725 10,000 -7000 -2000 -275 725 5 10,000 -7000 -2000 -275 725 -253.75 471.25 2751 7 10,0001 -7000 -2000 275 6 10,000 -7000 -2000 -275 725 -253.75 471.25 275 2000 8 10,000 -7000 -2000 -275 725 10,000 -7000 -2000 275 725 -253.75 471.25 275 725 725 -1,500 525 975.00 -253.75 -253.75 -253.75 -253.75 -253.75 471.25 275 -275 725 -253.75 471.25 275 471.25 2751 471.25 275 471.25 275 471.25 275 471.25 275 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 -2750 15001 -700 1,000! 15001 -700 -7501 350 1,000 600 -600 4,325.00 0 15001 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 0 0 746.25 1500 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 ol 746.25 1500 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 0 746.25 1500 -700 1,000 1,800 0 1,800 800 1,000 1,746.25 -1,200 -453.75 800 746.25 800.00