Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.77 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 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 $10.05 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 $5.09 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% of their sale price. Theincreased production will also require increased inventory on hand of $1.11 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 9% of the cost of goods sold. Billingham's marginal corporate tax rate is 21%.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 9.9%, compute the NPV of the purchase.d. While the expected new sales will be $10.05 million per year from the expansion, estimates range from $7.95 million to $12.15 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 $3.97 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 $10.05 million expected for the XC-750) per year in those years would justify purchasing the larger machine? Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.77 million.Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study toanalyze 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 $10.05 million per year in additional sales, which will continuefor the 10-year life of the machine.• Operations: The disruption caused by the installation will decrease sales by $5.09 million this year. As with Billingham's existing products, the cost of goods forthe products produced by the XC-750 is expected to be 72% of their sale price. Theincreased production will also require increased inventory on hand of $1.11 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 $1.91 million per year.• Accounting: The XC-750 will be depreciated via the straight-line method over the 10-year life of the machine. The firm expects receivables from the new sales tobe 15% of revenues and payables to be 9% of the cost of goods sold. Billingham's marginal corporate tax rate is 21%.a. Determine the incremental earnings from the purchase of the XC-750.b. Determine the free cash flow from the purchase of the XC-750.c. If the appropriate cost of capital for the expansion is 9.9%. compute the NPV of the purchase.Incremental Effects (with vs. without XC-750)atYear1-10ISESales Revenues$LyCost of Goods SoldbleS, G, and A ExpensesthisDepreciationusibEBIT22 cCheTaxes at 21%SaleUnlevered Net Incomehehain n

Question

Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.77 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 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 $10.05 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 $5.09 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% of their sale price. Theincreased production will also require increased inventory on hand of $1.11 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 9% of the cost of goods sold. Billingham's marginal corporate tax rate is 21%.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 9.9%, compute the NPV of the purchase.d. While the expected new sales will be $10.05 million per year from the expansion, estimates range from $7.95 million to  $12.15 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 $3.97 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 $10.05 million expected for the XC-750) per year in those years would justify purchasing the larger machine? Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.77 million.Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study toanalyze 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 $10.05 million per year in additional sales, which will continuefor the 10-year life of the machine.• Operations: The disruption caused by the installation will decrease sales by $5.09 million this year. As with Billingham's existing products, the cost of goods forthe products produced by the XC-750 is expected to be 72% of their sale price. Theincreased production will also require increased inventory on hand of $1.11 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 $1.91 million per year.• Accounting: The XC-750 will be depreciated via the straight-line method over the 10-year life of the machine. The firm expects receivables from the new sales tobe 15% of revenues and payables to be 9% of the cost of goods sold. Billingham's marginal corporate tax rate is 21%.a. Determine the incremental earnings from the purchase of the XC-750.b. Determine the free cash flow from the purchase of the XC-750.c. If the appropriate cost of capital for the expansion is 9.9%. compute the NPV of the purchase.Incremental Effects (with vs. without XC-750)atYear1-10ISESales Revenues$LyCost of Goods SoldbleS, G, and A ExpensesthisDepreciationusibEBIT22 cCheTaxes at 21%SaleUnlevered Net Incomehehain n

Accepted Answer

The net present value is used to determine if an investment is worthwhile. It calculates whether you…