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Sales revenue Cost of goods sold Additional personnel Depreciation EBIT Minus income tax a. Incremental Earnings Plus depreciation Capital Expenditures Subtract change in NWC b. Free cash flow c. Cost of capital NPV IRR MIRR PI PB Period Net Working Capital Calculations: Increased receivables Increased payables Increased inventory NWC d. Sales revenue Base case High revenue Low revenue e. Breakeven sales Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 NPV 12,000.00 8,000.00 Breakeven cost of goods sold Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 f. Sales revenue Cost of goods sold Additional personnel Depreciation Net operating income Minus income tax Equals Net income Plus depreciation Capital Expenditures Subtract change in NWC Free cash flow Cost of capital NPV Net Working Capital Calculations: Increased receivables Increased payables Increased inventory NWC Breakeven sales with more expensive machine Additional sales needed to break even with more expensive machine

Sales revenue Cost of goods sold Additional personnel Depreciation EBIT Minus income tax a. Incremental Earnings Plus depreciation Capital Expenditures Subtract change in NWC b. Free cash flow c. Cost of capital NPV IRR MIRR PI PB Period Net Working Capital Calculations: Increased receivables Increased payables Increased inventory NWC d. Sales revenue Base case High revenue Low revenue e. Breakeven sales Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 NPV 12,000.00 8,000.00 Breakeven cost of goods sold Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 f. Sales revenue Cost of goods sold Additional personnel Depreciation Net operating income Minus income tax Equals Net income Plus depreciation Capital Expenditures Subtract change in NWC Free cash flow Cost of capital NPV Net Working Capital Calculations: Increased receivables Increased payables Increased inventory NWC Breakeven sales with more expensive machine Additional sales needed to break even with more expensive machine

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter21: Supply Chains And Working Capital Management
Section: Chapter Questions
Problem 1Q: a. Working capital; net working capital; net operating working capital b. Current asset usage...
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Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. 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 $10 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 also require increased inventory on hand of $1 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 million per year.
• Accounting: The XC-750 will be depreciated via the straight-line method over the ten-year life of the machine. The firm expects receivables from the new sales to be 15% 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%, compute the NPV, IRR,MIRR, PI, and payback period of the purchase. 
d) While the expected new sales will be $10 million per year from the expansion, estimates range from $8 million to $12 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 break-even
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 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 $10 million expected for the XC-750) per year in those years would justify purchasing the larger machine?
Sales revenue Cost of goods sold Additional personnel Depreciation EBIT Minus income tax a. Incremental Earnings Plus depreciation Capital Expenditures Subtract change in NWC b. Free cash flow c. Cost of capital NPV IRR MIRR PI PB Period Net Working Capital Calculations: Increased receivables Increased payables Increased inventory NWC d. Sales revenue Base case High revenue Low revenue e. Breakeven sales Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 NPV 12,000.00 8,000.00 Breakeven cost of goods sold Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 f. Sales revenue Cost of goods sold Additional personnel Depreciation Net operating income Minus income tax Equals Net income Plus depreciation Capital Expenditures Subtract change in NWC Free cash flow Cost of capital NPV Net Working Capital Calculations: Increased receivables Increased payables Increased inventory NWC Breakeven sales with more expensive machine Additional sales needed to break even with more expensive machine
Transcribed Image Text:Sales revenue Cost of goods sold Additional personnel Depreciation EBIT Minus income tax a. Incremental Earnings Plus depreciation Capital Expenditures Subtract change in NWC b. Free cash flow c. Cost of capital NPV IRR MIRR PI PB Period Net Working Capital Calculations: Increased receivables Increased payables Increased inventory NWC d. Sales revenue Base case High revenue Low revenue e. Breakeven sales Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 NPV 12,000.00 8,000.00 Breakeven cost of goods sold Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 f. Sales revenue Cost of goods sold Additional personnel Depreciation Net operating income Minus income tax Equals Net income Plus depreciation Capital Expenditures Subtract change in NWC Free cash flow Cost of capital NPV Net Working Capital Calculations: Increased receivables Increased payables Increased inventory NWC Breakeven sales with more expensive machine Additional sales needed to break even with more expensive machine
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