Billingham Packaging is considering expanding its production capacity by purchas
ID: 2483551 • Letter: B
Question
Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is dollar 2.81 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a dollar 46,000 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 dollar 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 dollar 5.04 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 72 percent of their sale price. The increased production will also require increased inventory on hand of dollar 1.17 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 dollar 2.02 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 15 percent of revenues and payables to be 10 percent of the cost of goods sold. Billingham's marginal corporate tax rate is 35 percent. Determine the incremental earnings from the purchase of the XC-750. Determine the free cash flow from the purchase of the XC-750. If the appropriate cost of capital for the expansion is 10.4%, compute the NPV of the purchase. While the expected new sales will be dollar 10.05 million per year from the expansion, estimates range from dollar 8.10 million to dollar 12.00 million. What is the NPV in the worst case? In theExplanation / Answer
Answer a
Answerr 2
Net working ccalculation
Answer 2
Free cash Flow
year 0 => 3874160 (917280 + 776880+ 2180000)
year 1 => -515770 (415350 + 281000 - 1212120)
Year 2-9 => 696350 (415350 + 281000)
year 10 => 1866350 (41350 + 281000 + 1170000)
Answer 3
NPV => -$330738.88
YEAR 0 1-10 Sales Revenue 5040000 10500000 COGS 3628800 7560000 S,g & A expenses 0 2020000 Depreciation 0 281000 EBIT 1411200 639000 Taxes @ 35% 493920 223650 UNLEVERED NET INCOME 917280 415350Related Questions
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