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 $49,000 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 $5.04 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 $1.01 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 $1.98 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 16% of revenues and payables to be 10% 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 10.3%, 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 $8.10 million to $12.30 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 $4.05 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 3 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 0 1-10 Sales Revenues -5040000 10200000 Cost of Goods Sold 3578400 -7242000 S, G, and A Expenses 0 -1980000 Depreciation 0 -277000 EBIT $ -1461600 $ 701000 Taxes at 21% 306936 -147210 $ Unlevered Net Income -1154664 $ 553790 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 below (with vs. without XC?750): (Note: the change in net working capital for year 0 is equal to the sum of the change in accounts receivable due to the decrease in sales, the change in inventory due to the increase in inventory starting in year 0, and the change in accounts payable due to the decrease in cost of goods sold.) (Round to the nearest dollar.) Incremental Effects (with vs. without XC-750) Year 0 1 2-9 10 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 10.3%, 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 $10.20 million per year from the expansion, estimates range from $8.10 million to $12.30 million. What is the NPV in the worst case? In the best case? The NPV of the purchase for sales of $8.10 million is $ (Round to the nearest dollar.) The NPV of the purchase for sales of $12.30 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 breakeven level for the cost of goods sold? The breakeven level for the cost of goods sold is % of sales. (Round to two decimal places.) f. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4.05 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 3 XC-750) per year in those years would justify purchasing the larger machine? The additional sales would need to be $ . (Round to the nearest dollar.)