Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the $xC-750.$ The

cost of the XC$-750$ is $$2\mathrm{.}82$ million. Unfortunately, installing this machine will take several months and will partially

disrupt production. The firm has just completed a $$47,000$ 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\mathrm{.}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\mathrm{.}01$ 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\mathrm{.}12$ 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\mathrm{.}02$ million

per year.

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 $14\%$ of revenues and payables to be $10\%$ of the cost of goods sold.

Billingham's marginal corporate tax rate is $30\%.$

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 $9\mathrm{.}7\%,$ compute the NPV of the purchase.

d$.$ While the expected new sales will be $$10\mathrm{.}05$ million per year from the expansion, estimates range from $$8\mathrm{.}10$ million

to $$12\mathrm{.}00$ 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 breakeven 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 $$3\mathrm{.}92$

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 level of additional sales $($above the $$10\mathrm{.}05$ million expected for the XC$-750)$ per year in those

years would justify purchasing the larger machine?