uestion 20 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 21%. 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 3-10. 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? 1. What kind of real option does the XC-900 machine provide to Billingham? (Select all the choices that apply.) A. If it would be beneficial to expand production, Billingham will increase production with the XC-900. B. If it would be better if production remains the same, Billingham is under no obligation to utilize all of the XC-900 production capacity. C. The XC-900 allows Billingham the option to expand production starting in year 3. D. The expansion will require additional sales and administrative personnel. 2. If Billingham knows that it can sell the XC-750 to another firm for $2.00 million in two years, what kind of real option would that provide? (Select the best choice.) A. This provides Billingham the option to abandon the investment B. The decreased production will require decreased inventory C. The firm can recover the feasibility study cost D. Billingham will no longer depreciate the machine.

uestion 20 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 21%. 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 3-10. 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? 1. What kind of real option does the XC-900 machine provide to Billingham? (Select all the choices that apply.) A. If it would be beneficial to expand production, Billingham will increase production with the XC-900. B. If it would be better if production remains the same, Billingham is under no obligation to utilize all of the XC-900 production capacity. C. The XC-900 allows Billingham the option to expand production starting in year 3. D. The expansion will require additional sales and administrative personnel. 2. If Billingham knows that it can sell the XC-750 to another firm for $2.00 million in two years, what kind of real option would that provide? (Select the best choice.) A. This provides Billingham the option to abandon the investment B. The decreased production will require decreased inventory C. The firm can recover the feasibility study cost D. Billingham will no longer depreciate the machine.

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 16P: REPLACEMENT CHAIN The Fernandez Company has an opportunity to invest in one of two mutually...

See similar textbooks

Related questions

Question

question 20

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 21%.

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 3-10. 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?

1. What kind of real option does the XC-900 machine provide to Billingham? (Select all the choices that apply.)

A. If it would be beneficial to expand production, Billingham will increase production with the XC-900.

B. If it would be better if production remains the same, Billingham is under no obligation to utilize all of the XC-900 production capacity.

C. The XC-900 allows Billingham the option to expand production starting in year 3.

D. The expansion will require additional sales and administrative personnel.

2. If Billingham knows that it can sell the XC-750 to another firm for

$2.00 million in two years, what kind of real option would that provide? (Select the best choice.)

A. This provides Billingham the option to abandon the investment

B. The decreased production will require decreased inventory

C. The firm can recover the feasibility study cost

D. Billingham will no longer depreciate the machine.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.