Billingham Packaging is considering expanding its production capacity by purchasing a newmachine, theXC-750. The cost of theXC-750 is $2.83 million.Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $46,000 feasibility study to analyze the decision to buy theXC-750, resulting in the followingestimates:

Marketing: Once theXC-750 is operational nextyear, the extra capacity is expected to generate $10.15 million per year in additionalsales, which will continue for the10-year life of the machine.

Operations: The disruption caused by the installation will decrease sales by $5.07 million this year. As withBillingham's existingproducts, the cost of goods for the products produced by theXC-750 is expected to be 72% of their sale price. The

increased production will also require increased inventory on hand of $1.16 million during the life of theproject, including year 0.

HumanResources: The expansion will require additional sales and administrative personnel at a cost of $1.99 million per year.

Accounting: TheXC-750 will be depreciated via thestraight-line method over the10-year life of the machine. The firm expects receivables from the new sales to be 16% of revenues and payables to be 11% of the cost of goods sold.Billingham's marginal corporate tax rate is 21%.

a. Determine the incremental earnings from the purchase of theXC-750.

b. Determine the free cash flow from the purchase of theXC-750.

c. If the appropriate cost of capital for the expansion is 9.9%, compute the NPV of the purchase.

d. While the expected new sales will be $10.15 million per year from theexpansion, estimates range from $8.05 million to$12.25 million. What is the NPV in the worstcase? In the bestcase?

e. What is thebreak-even level of new sales from theexpansion? What is the breakeven level for the cost of goodssold?

f. Billingham could instead purchase theXC-900, which offers even greater capacity. The cost of theXC-900 is $4.09 million. The extra capacity would not be useful in the first two years ofoperation, but would allow for additional sales in years 3 through 10. What level of additional sales(above the $10.15 million expected for theXC-750) per year in those years would justify purchasing the largermachine?