Bilingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost o

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Bilingham Packaging Is Considering Expanding Its Production Capacity By Purchasing A New Machine The Xc 750 The Cost O 1 (42.06 KiB) Viewed 33 times

Bilingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.74 milion Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $46.000 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 S10.20 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 $4.93 million this year. As wih Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 68% of their sale price. The increased production will also require increased inventory on hand of $1.09 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 $2.05 million per year. • Accounting: The XC-750 will be depreciated via the straight-line method over the 10-year ife of the machine. The firm expects receivables from the new sales to be 15% of revenues and payables to be 10% of the cost of goods sold. Bilingham'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 9.6%, compute the NPV of the purchase. a. Determine the incremental eamings from the purchase of the XC-750, Calculate the incremental camings from the purchase of the XC-750 below (with vs, without XC7750) (Round to the nearest collar) Incremental Effects Year Sales Revenues $ Cost of Goods Sold $ S, G, and A Expenses $ Depreciation $ EBIT Taxes at 35% Unlevered Not Income