Project on FI Data Case

The cost of the XC-750 is $2.75 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $50,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: ■ Marketing: Once the XC-750 is operating next year, the extra capacity is expected to generate $11 million per year in additional sales, which will continue for the ten-year life of the machine. ■ Operations: The disruption caused by the installation will decrease sales by $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% of their sale price. The increased production will require additional inventory of $1 million, to be added in year 0 and depleted in year 10. ■ Human Resources: The expansion will require additional sales and administrative personnel at a cost of $2 million per year. ■ Accounting: The XC-750 will be depreciated via the straight-line method in years 1–10. Receivables are expected to be 15% of revenues and payables to be 10% of the cost of goods sold. Billingham’s marginal corporate tax rate is 35%. ■ Cost of Capital: Billingham Packaging believes that the new project has the same cost of capital as its current assets. Currently, Billingham Packaging is all-equity financed. Its equity beta is 1.4. The risk-free rate is 3%, and the market risk premium is 5%. 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. Compute the NPV of the expansion project. Year 0 1 2 3 4 5 6 7 8 9 10 11 Sales revenues -5,000 11000 11000 11000 11000 11000 11000 11000 11000 11000 11000 Cost of goods sold S, G