Question

Billingham Packaging is considering expanding its production capacity by purchasing a new​ machine, the​ XC-750. The cost of the​ XC-750 is $2.79 million.​ Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $47,000 feasibility study to analyze the decision to buy the​ XC-750, resulting in the following​ estimates: bullet

•​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 $5.02 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 69% of their sale price. The increased production will also require increased inventory on hand of $1.05 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 $1.91 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 11% 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 9.6%​, compute the NPV of the purchase.

d. While the expected new sales will be $10.00 mmillion per year from the​ expansion, estimates range from $8.10 million to $11.90 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 $10.00 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	$	–5050000
Cost of Goods Sold	$
S, G, and A Expenses	$
Depreciation	$
EBIT	$
Taxes at 35%	$
Unlevered Net Income	$

Answer 1

a. Incremental Earnings

The same with Excel formulas shown:

b. Free Cash Flows

The same with Excel formulas shown:

c. NPV

The same with Excel formulas shown:

a. Worst and Best Case NPV

The same with Excel formulas shown: