Calculate the incremental earnings from the purchase of the XC-750 below (with vs. without XC-750): (Round to the nearest dollar.) Incremental Effects (with vs. without XC-750) Year Sales Cost of Goods Sold Selling, General, and Administrative Expenses Depreciation EBIT Taxes at 21% Unlevered Net Income 0 $ $ $ 1-10

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
icon
Related questions
Question
Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.83 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 $10.20 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 $4.96 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 $1.13 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 $1.94 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 14% of revenues and
payables to be 11% 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 10.2%, compute the NPV of the purchase.
d. While the expected new sales will be $10.20 million per year from the expansion, estimates range from $8.25 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 $4.03 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 $10.20 million expected for the XC-750) per year in those years would justify
purchasing the larger machine?
Transcribed Image Text:Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.83 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 $10.20 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 $4.96 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 $1.13 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 $1.94 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 14% of revenues and payables to be 11% 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 10.2%, compute the NPV of the purchase. d. While the expected new sales will be $10.20 million per year from the expansion, estimates range from $8.25 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 $4.03 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 $10.20 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 (with vs. without XC-750)
Year
Sales
Cost of Goods Sold
Selling, General, and Administrative Expenses
Depreciation
EBIT
Taxes at 21%
Unlevered Net Income
$
GA
$
LA
CA
LA
1-10
Transcribed Image Text: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 (with vs. without XC-750) Year Sales Cost of Goods Sold Selling, General, and Administrative Expenses Depreciation EBIT Taxes at 21% Unlevered Net Income $ GA $ LA CA LA 1-10
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 1 images

Blurred answer
Knowledge Booster
Income Statement Analysis
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education