Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.78 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 $10.10 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 $5.07 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 73% of their sale price. The increased production will also require increased inventory on hand of $1.02 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 $2.06 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 20%. Year Sales 1-10 (5,070,000) $ 10,100,000 Cost of Goods Sold 3,701,100 (7.373,000) Selling, General, and Administrative Expenses 0 (2,060,000) Depreciation (278,000) EBIT (1,368,900) $ 389,000 Taxes at 20% Unlevered Net Income 273,780 (1,095,120) $ (77,800) 311,200 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.)
Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.78 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 $10.10 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 $5.07 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 73% of their sale price. The increased production will also require increased inventory on hand of $1.02 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 $2.06 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 20%. Year Sales 1-10 (5,070,000) $ 10,100,000 Cost of Goods Sold 3,701,100 (7.373,000) Selling, General, and Administrative Expenses 0 (2,060,000) Depreciation (278,000) EBIT (1,368,900) $ 389,000 Taxes at 20% Unlevered Net Income 273,780 (1,095,120) $ (77,800) 311,200 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.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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.) PLEASE FILL OUT CHART OF PART B
Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.78 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 $10.10 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 $5.07 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 73% of their sale price. The increased production will also require increased inventory on hand of $1.02 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 $2.06 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 20%.
Year
1-10
Sales
$ (5,070,000) $
Cost of Goods Sold
3,701,100
10,100,000
(7,373,000)
Selling, General, and Administrative Expenses
0
(2,060,000)
Depreciation
0
(278,000)
EBIT
$ (1,368,900) $
389,000
Taxes at 20%
Unlevered Net Income
273,780
$ (1,095,120) $
(77,800)
311,200
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 (with vs. without XC-750)
Year
0
Unlevered Net Income
$
Add Back Depreciation
Capital Expenditures
Subtract Changes in NWC
Free Cash Flows
2-9
10
11
$
$
$
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