Billingham Packaging is considering expanding its production capacity by purchasing a newmachine, theXC-750. The cost of theXC-750 is $2.68 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 operating nextyear, the extra capacity is expected to generate $10.05 million per year in additionalsales, which will continue for theten-year life of the machine.

Operations: The disruption caused by the installation will decrease sales by $4.93 million this year. As withBillingham's existingproducts, the cost of goods for the products produced by theXC-750 is expected to be 71 % of their sale price. The increased production will also require increased inventory on hand of $ 1.07 million during the life of the project. The increased production will require additional inventory of $ 1.07 million, to be added in year 0 and depleted in year 10.

HumanResources: The expansion will require additional sales and administrative personnel at a cost of $2 million per year.

Accounting: TheXC-750 will be depreciated via thestraight-line method in years1?10. Receivables are expected to be 15 % of revenues and payables to be

11% of the cost of goods sold.Billingham's marginal corporate tax rate is 15%.

a. Determine the incremental earning 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 10.3%, compute the NPV of the purchase

d. While the expected new sales will be $10.05 million per year from $7.95 to $12.15 million. What is the NPV in the worst case? In the best case?

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

f. Billingham could instead purchase theXC-900, which offers even greater capacity. The cost of theXC-900 is $3.98 million. The extra capacity would not be useful in the first two years ofoperation, but would allow for additional sales in years3-10. What level of additional sales(above the $10.05 million expected for theXC-750) per year in those years would justify purchasing the largermachine?