Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.81 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 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 $10.05 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 $5.02 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 73% of their sale price. The increased production will also require increased inventory on hand of $1.07 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 $2.03 million per year. •Accounting: The XC-750 will be depreciated via the straight-line method over the 10-vear life of the machine. The firm CO Incremental Effects (with vs. without XC-750) Year 0 1-10 Sales Revenues $ Cost of Goods Sold S, G, and A Expenses Depreciation EBIT $ Taxes at 21% $ $ Unlevered Net Income
Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.81 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 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 $10.05 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 $5.02 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 73% of their sale price. The increased production will also require increased inventory on hand of $1.07 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 $2.03 million per year. •Accounting: The XC-750 will be depreciated via the straight-line method over the 10-vear life of the machine. The firm CO Incremental Effects (with vs. without XC-750) Year 0 1-10 Sales Revenues $ Cost of Goods Sold S, G, and A Expenses Depreciation EBIT $ Taxes at 21% $ $ Unlevered Net Income
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The
cost of the XC-750 is $2.81 million. Unfortunately, installing this machine will take several months and will partially
disrupt production. The firm has just completed a $45,000 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 $10.05 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 $5.02 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 73% of their sale price.
The
increased production will also require increased inventory on hand of $1.07 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 $2.03 million
per year.
•Accounting: The XC-750 will be depreciated via the straight-line method over the 10-vear life of the machine. The firm
CO
Incremental Effects (with vs. without XC-750)
Year
0
1-10
Sales Revenues
$
Cost of Goods Sold
S, G, and A Expenses
Depreciation
EBIT
$
Taxes at 21%
$
$
Unlevered Net Income
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