Question

n Blingham Packaging is considering expanding its production capacity by Unfortunately, instaling this machine will take several months and will paral the decision to buy the XC 750, resulting in the folowing estimates purchasing a new maching, the XC-750 The cost of the Xc-750 is $2.85 mition y disrupt production The Sum has just completed a 549.000 feasibility study to analyze i by the i capacity is cxpected to generate $10 05 millon per year in addisional sales, which will consnue for the 10-year life of the machine Operations. The disruption caused products produced by the XC750 is expected to be 67% of their sale price The increased production will also require increased inwentory on hand of $1.09 millon during the Iife of the pr instalation will decrease sales hy $5 02 milion this year As with Bilingham's existing products, the cost of goods for the ajact including year 0 ces The expansion will require additional sales and administrative parsonnel at a cost of $2 05 milon psr year ng The XC-750 will be depreciated via the straight-line mathod over the 10-year life af the machine. The fim expects recevables fram the new ssles to be 15% of revenues and payables to be 10% of the cost of goods sold. Bilingham's marginal corporate tax rate la 35% a. Determine the incremental earnings from the purchase of the XC-750 b. Determine the free cash flow rom the purchase of the XC-750 c.mhe appropriate cost of capRai Sor the expansion is 104%, congiule he NPV of the purchase a. Datarmine the incremental earnings from the puichase of the XC-750 Calculate the incremantal earnings trom the purchsse of the XC-750 below (with vs without XC2750), (Round to the nearest dolar) Incremental Effects 1.10 Year Cost of Goods Sold s, G, and A Expense Deprecation EBIT Enter any number in the edit fields and then continue to the next quresion products produced by the XC 750 is expected to be 67% of their sale price The increased production will also require increased inventory on hand of $1.09 milion during the ife of the project, induding year 0 . Human Resources The expansion will require additional sales and administrative personnel at a cost of $2.05 milian per year Accounting The XC-750 will be depreciated via the straight-ins misthod aver the 10 year ife of the machine. The firm expecis recelvables trom the new sales to be 15% of revenues and payables to be 10% of the cost of goods sold Bingham's marginal corporate tax rate is 35% a. Determine the incremental eamings from the purchase of the XC-750 b. Determine the free cash fow trom the purchase of the XC-750 c. If the appropriate cost of Captal for the expansions 10 4% , compute the Npy of te purchase d. While the expected nw sales wili be $10 05 million per worst case? In the best case? e. What is the break-even level of new sales from the expansion? What is the breakavan level for the cost of goods sold? f. Bilingham couild instead purchase the XC-900, which offers even greater capacity The coat of he XC-900 is $4.03 n the first two years of cperation bun would aliow for addisional sales in years 3 trough 10. What lewal of addb onsl sales (above the $10 05 mllon expecd Ior the XC-750) per year in those years would justily purchasing the lsrger machine? year from the expansion, estimates range from $8.00 milion to $12.1D milion What is the NPV in the a. Determine the incremental eamings fron the purchase of the XC0 Calculate the incramental earnings from the purchase of the XC-750 below (iwith ws. without XC9750) (Round to tha nearest dollar) incremental Ettects 110 Saies Reeenues ncom Cost of Goods Sold S、G, and A Expenses Depreciatior EBIT Emer any rmbet in the edit fields and then continue to the next quesion Savs for Later

Answer 1

incremental earning was obtained to be Rs. 0.638 mn.

FCFF is shown in attached screenshot.

NPV is also calculated using the given cost of capital.

cost of machine duration depreciation 0.285 2.85 10 Additional sales 10 10.05 decreased sales 10.05 10.05 5.02 10.05 10.05 10.05 10.05 10.05 10.05 10.05 10.05 revenue incremental COGS 6.7335 3.3634 6.7335 6.7335 6.7335 6.73356.7335 6.7335 6.7335 6.7335 6.73356.7335 SG&A sales & admin cost 2.05 2.05 2.05 2.05 2.05 2.05 2.05 2.05 2.05 inventory 1.09 depreciation 0.285 0.2850 0.285 0.285 0.285 0.285 0.285 0. 0.2850.285 0. receivables 1.5075 EBIT 1.65660.9815 0.98150.9815 0.9815 0.9815 0.9815 0.9815 0.9815 0.9815 0.9815 payables 0.67335 PAT (incremental) 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 tax rate 35% Cost of capital 10.40% NOPAT 1.07679 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 0.637975 depreciation 0.285 0.285 0.2850.285 0.285 0.285 0.285 0.285 0.285 0.285 change in WC 1.09 0.83415 0 0 0 0 0 1.92415 FCFF incremental 2.16679 0.088825 0.922975 0.922975 0.922975 0.922975 0.922975 0.922975 0.922975 0.922975 0.922975 PV 0.080457 0.757272 0.685935 0.621318 0.562788 0.509771 0.461749 0.418251 0.378851 0.343162 Sum PV 4.819554 NPV -0.19724

For the 2 cases also the NPV was calculated with similar approach. And when the revenue was 8 mn then NPV was -2.69 mn while for 12.1 mn revenue levels it was about 2.30 mn.

Breakeven levels for revenue were found to be Rs. 12.9 mn. while that for COGS were found to be Rs. 8.65 mn.