Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. Thecost of the XC-750 is $2.25 million. Unfortunately, installing this machine will take several months and will partiallydisrupt 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 $10.5 million per year inadditional 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 (year 0). Once themachine is operating next year, the cost of goods for the products produced by the XC-750 is expected to be 70% oftheir sale price. The increased production will require additional inventory on hand of $2.0 million, to be added in year 0and depleted in year 10.Human Resources: The expansion will require additional sales and administrative personnel at a cost of $2 million peryear.Accounting: The XC-750 has a CCA rate of 35% and no salvage value is expected. The firm expects receivables fromthe new sales to be 10% of revenues and payables are expected to be 10% of the cost of goods sold. Buckingham'smarginal corporate tax rate is 33%.c. If the appropriate cost of capital for the expansion is 12%, compute the NPV of the purchase (including all CCA taxshield effects). (Hint: when calculating the NPV, you should calculate the free cash flows excluding CCA tax shields thenadd the PV CCA tax shields to get the NPV.)d. While the expected new sales will be $10.5 million per year from the expansion, estimates range from $8,400,000 to$12,600,000. What is the NPV in the worst case? In the best case?c. If the appropriate cost of capital for the expansion is 12%, compute the NPV of the purchase.The NPV is $ . (Round to the nearest dollar.)

Answered: Image /qna-images/answer/05d5a30b-3fc8-4886-88db-37f92821e578.jpg

Answered: cost of the XC-750 is $2.25 million.…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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