Question

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 operational next​ year, the extra capacity is expected to generate $10.00 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 $5.00 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 also require increased inventory on hand of $1.00 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 $2.00 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% of revenues and payables to be 10% of the cost of goods sold.​ Billingham's marginal corporate tax rate is 35%.

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. If the appropriate cost of capital for the expansion is 10.0%, compute the NPV of the purchase. ___________.

d. While the expected new sales will be $10.00 million per year from the​ expansion, estimates range from $8.00 million to $12.00 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 $4.00 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 $10.00 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 the nearest​ dollar.)

Incremental Effects
Year		0
Sales Revenues	$	(5,000,000)
Cost of Goods Sold	$	3,500,000
S, G, and A Expenses	$	0
Depreciation	$	0
EBIT	$	(1,500,000)
Taxes at 35%	$	525,000
Unlevered Net Income	$	(975,000)

	1-10
$	10,000,000
$	(7,000,000)
$	(2,000,000)
$	(275,000)
$	725,000
$	(253,750)
$	471,250

b. Determine the free cash flow from the purchase of the​ XC-750.

Calculate the free cash flow from the purchase of the​ XC-750 below​ (with vs. without​ XC?750): ​ (Note: the change in net working capital for year 0 is equal to the sum of the change in accounts receivable due to the decrease in​ sales, the change in inventory due to the increase in inventory starting in year​ 0, and the change in accounts payable due to the decrease in cost of goods​ sold.)  ​(Round to the nearest​ dollar.)

Incremental Effects
Year		0
Unlevered Net Income	$	(975,000)
Depreciation	$	0
Capital Expenditures	$	(2,750,000)
Change on Net Working Capital	$	(600,000)
Free cash flow	$	(4,325,000)

Year	1
$
$
$
$
$

I did part A and started part B; can you show me the break down on how you got your answers. If you do it in excel you can do a screen shot of excel and go to the formulas tab and then hit the button show formulas to take a screen of that as well. Thank you in advance!

Answer 1