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. The increased 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.
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. The increased 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.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...
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 $2.77 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. The
increased 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.
![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. The
increased 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.
Incremental Effects (with vs. without XC-750)
Year
1-10
Sales Revenues
$
Cost of Goods Sold
S, G, and A Expenses
Depreciation
EBIT
$
24
m
Taxes at 21%
2$
2$
Unlevered Net Income
sib](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8548eebc-136a-4c70-8601-04e6be8c37eb%2F54a07843-e60d-4c18-9124-4503e5ab7ab8%2Fjmfta45_processed.jpeg&w=3840&q=75)
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 $2.77 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. The
increased 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.
Incremental Effects (with vs. without XC-750)
Year
1-10
Sales Revenues
$
Cost of Goods Sold
S, G, and A Expenses
Depreciation
EBIT
$
24
m
Taxes at 21%
2$
2$
Unlevered Net Income
sib
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
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.Recommended textbooks for you
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
![Essentials of Business Analytics (MindTap Course …](https://www.bartleby.com/isbn_cover_images/9781305627734/9781305627734_smallCoverImage.gif)
Essentials of Business Analytics (MindTap Course …
Statistics
ISBN:
9781305627734
Author:
Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:
Cengage Learning
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
![Essentials of Business Analytics (MindTap Course …](https://www.bartleby.com/isbn_cover_images/9781305627734/9781305627734_smallCoverImage.gif)
Essentials of Business Analytics (MindTap Course …
Statistics
ISBN:
9781305627734
Author:
Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:
Cengage Learning