Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $3.00 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 $9.5 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 million this year. Once the machine is operating next year, 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 on hand of $1.5 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 has a CCA rate of 35% and no salvage value is expected. The firm expects receivables from the new sales to be 12% of revenues and payables to be 10% of the cost of goods sold. Buckingham's marginal corporate tax rate is 28%. e. If the appropriate cost of capital for the expansion is 14%, what is the NPV break-even level of new sales for the expansion? What is the NPV break-even level for the cost of goods sold? f. Buckingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3-10. What level of additional sales (above the $9.5 million expected for the XC-750) per year in those years would justify purchasing the larger machine? e. If the appropriate cost of capital for the expansion is 14%, what is the NPV break-even level of new sales for the expansion? The break-even level of sales of the expansion is $ (Round to the nearest dollar.)
Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $3.00 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 $9.5 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 million this year. Once the machine is operating next year, 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 on hand of $1.5 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 has a CCA rate of 35% and no salvage value is expected. The firm expects receivables from the new sales to be 12% of revenues and payables to be 10% of the cost of goods sold. Buckingham's marginal corporate tax rate is 28%. e. If the appropriate cost of capital for the expansion is 14%, what is the NPV break-even level of new sales for the expansion? What is the NPV break-even level for the cost of goods sold? f. Buckingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3-10. What level of additional sales (above the $9.5 million expected for the XC-750) per year in those years would justify purchasing the larger machine? e. If the appropriate cost of capital for the expansion is 14%, what is the NPV break-even level of new sales for the expansion? The break-even level of sales of the expansion is $ (Round to the nearest dollar.)
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1aM
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Transcribed Image Text:Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $3.00 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 $9.5 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 million this year. Once the machine is operating next year, 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 on hand of $1.5 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 has a CCA rate of 35% and no salvage value is expected. The firm expects receivables from the new sales to be 12% of revenues and payables to be 10% of the cost of goods sold. Buckingham's
marginal corporate tax rate is 28%.
e. If the appropriate cost of capital for the expansion is 14%, what is the NPV break-even level of new sales for the expansion? What is the NPV break-even level for the cost of goods sold?
f. Buckingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional
sales in years 3-10. What level of additional sales (above the $9.5 million expected for the XC-750) per year in those years would justify purchasing the larger machine?
e. If the appropriate cost of capital for the expansion is 14%, what is the NPV break-even level of new sales for the expansion?
The break-even level of sales of the expansion is $
(Round to the nearest dollar.)
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