Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.74 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 $10.5 million per year in additional sales, which will continue for the ten-year life of the machine.

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Operations: The disruption caused by the installation will decrease sales by $4.94 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 71% of their sale price. The increased production will also require increased inventory on hand of $1.14 million during the life of the project, including year 0 and depleted in year 10.

Human Resources: The expansion will require additional sales and administrative personnel at a cost of $1.97 million per year.

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Accounting: The XC-750 will be depreciated via the straight-line method over the ten-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 35 %

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 10.1%, 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 $8.15 million to$11.95million. 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? If the firm believes that sales will not increase, but costs would be reduced by purchasing the newmachine, what is the break-even 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 $3.94 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 $10.05 million expected for theXC-750) per year in those years would justify purchasing the larger machine?

Determine the incremental earnings from the purchase of the XC-750.

Calculate the incremental earnings from the purchase of the XC-750 below:(Round to the nearest dollar.)

Incremental Earnings

Year

0

Sales Revenues

$

Cost of Goods Sold

$

S, G, and A Expenses

$

Depreciation

$

EBIT

$

Taxes at 35%

$

Unlevered Net Income

$

(Round to the nearest dollar.)

Incremental Earnings

Year

1-10

Sales Revenues

$

Cost of Goods Sold

$

S, G, and A Expenses

$

Depreciation

$

EBIT

$

Taxes at 35%

$

Unlevered Net Income

$

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:(Round to the nearest dollar.)

Incremental Free Cash Flow

Year

0

Unlevered Net Income

$

Depreciation

$

Capital Expenditures

$

Change in Net Working Capital

$

Free cash flow

$

(Round to the nearest dollar.)

Incremental Free Cash Flow

Year

1

Unlevered Net Income

$

Depreciation

$

Capital Expenditures

$

Change in Net Working Capital

$

Free cash flow

$

(Round to the nearest dollar.)

Incremental Free Cash Flow

Year

2-9

Unlevered Net Income

$

Depreciation

$

Capital Expenditures

$

Change in Net Working Capital

$

Free cash flow

$

(Round to the nearest dollar.)

Incremental Free Cash Flow

Year

10

Unlevered Net Income

$

Depreciation

$

Capital Expenditures

$

Change in Net Working Capital

$

Free cash flow

$

(Round to the nearest dollar.)

Incremental Free Cash Flow

Year

11

Unlevered Net Income

$

Depreciation

$

Capital Expenditures

$

Change in Net Working Capital

$

Free cash flow

$

c. If the appropriate cost of capital for the expansion is 10.1%, compute the NPV of the purchase.

The NPV of the purchase is $ _____________(Round to the nearest dollar.)

d. While the expected new sales will be $10.05 million per year from the expansion, estimates range from $8.15 million to$11.95million. What is the NPV in the worst case? In the best case?

The NPV of the purchase for sales of $8.15 million is $_________(Round to the nearest dollar.)

The NPV of the purchase for sales of $11.95 million is $ ________(Round to the nearest dollar.)

e. What is the break-even level of new sales from the expansion?

The break-even level of new sales from the expansion is $___________(Round to the nearest dollar.)

What is the break-even level for the cost of goods sold?

The break-even level for the cost of goods sold is $______________(Round to the nearest dollar.)

f. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $3.94 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 $10.05 million expected for theXC-750) per year in those years would justify purchasing the larger machine?

The additional sales are $______________(Round to the nearest dollar.)