i've got A finished please help with B and rest of questions thanks, not sure how to find change in nwc or fcf

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$2.75

million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a

$ 50 comma 000$50,000

feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates:

bullet

Marketing: Once the XC-750 is operating next year, the extra capacity is expected to generate

$ 10$10

million per year in additional sales, which will continue for the ten-year life of the machine.

bullet

Operations: The disruption caused by the installation will decrease sales by

$ 5$5

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 %70%

of their sale price. The increased production will also require increased inventory on hand of

$ 1$1

million during the life of the project. The increased production will require additional inventory of

$ 1$1

million, to be added in year 0 and depleted in year 10.

bullet

Human Resources: The expansion will require additional sales and administrative personnel at a cost of

$ 2$2

million per year.

bullet

Accounting: The XC-750 will be depreciated via the straight-line method in years 1?10. Receivables are expected to be

15 %15%

of revenues and payables to be

10 %10%

of the cost of goods sold. Billingham?s marginal corporate tax rate is

15 %15%.

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

10.0 %10.0%,

compute the NPV of the purchase. d. While the expected new sales will be

$ 10$10

million per year from the expansion, estimates range from

$ 8$8

million to

$ 12$12

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 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

$ 4$4

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$10

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:(Round to the nearest dollar.)

Incremental Earnings
Year		0
Sales Revenues	$	(5,000,000)
Cost of Goods Sold	$	3,500,000
S, G, and A Expenses	$	0
Depreciation	$	0
EBIT	$	(1,500,000)
Taxes at 15%	$	225,000
Unlevered Net Income	$	(1,275,000)

(Round to the nearest dollar.)

Incremental Earnings
Year		1-10
Sales Revenues	$	10,000,000
Cost of Goods Sold	$	(7,000,000)
S, G, and A Expenses	$	(2,000,000)
Depreciation	$	(275,000)
EBIT	$	725,000
Taxes at 15%	$	(108,750)
Unlevered Net Income	$	616,250

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	$	1275000
Depreciation	$	0
Capital Expenditures	$	2750000
Change in Net Working Capital	$	?
Free cash flow	$	?