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Part 1
BillinghamBillingham
Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is
$2.662.66
million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a
$48 comma 00048,000
feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates:
bullet•
Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate
$10.1010.10
million per year in additional sales, which will continue for the 10-year life of the machine.
bullet•
Operations: The disruption caused by the installation will decrease sales by
$5.075.07
million this year. As with
Billingham'sBillingham's
existing products, the cost of goods for the products produced by the XC-750 is expected to be
74 %74%
of their sale price. The increased production will also require increased inventory on hand of
$1.161.16
million during the life of the project, including year 0.
bullet•
Human Resources: The expansion will require additional sales and administrative personnel at a cost of
$2.092.09
million per year.
bullet•
Accounting: The XC-750 will be depreciated via the straight-line method over the 10-year life of the machine. The firm expects receivables from the new sales to be
16 %16%
of revenues and payables to be
10 %10%
of the cost of goods sold.
Billingham'sBillingham's
marginal corporate tax rate is
20 %20%.
BillinghamBillingham
could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is
$ 3.91$3.91
million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3 through 10.
What kind of real option does the XC-900 machine provide to
BillinghamBillingham?
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Part 1
What kind of real option does the XC-900 machine provide to
BillinghamBillingham?
(Select all the choices that apply.)