Gerrard Plc is considering expanding its production capabilities by purchasing a new machine. Its cost is $4.50 million. The machine will take at least four months to install and will disrupt some of the companys production. Gerrard Plc has very recently completed a $75,000 feasibility study to analyse the decision to buy the new machine, resulting in the following estimates:

• Once the new machine is in operation next year, the additional production capacity is expected to generate $12.00 million per year in additional sales, which will continue for the 10-year life of the machine.
• The disruption caused by the prolonged installation will decrease sales this year by $4.20 million. Once the machine is operating next year, the cost of goods for the products produced by the new machine is expected to be 65% of their sale price.
• The increased production will require additional inventory on hand of $1.35 million. This will be added in year 0 and retained for all years before being depleted to zero in year 10.
• The expansion will require additional sales and administrative staff at an annual cost of $1.54 million.
• The new machine will be depreciated via the straight-line method over its 10-year life. The company expects receivables from the new sales to be 12% of revenues and payables to be 9% of the cost of goods sold.
• Stackers Plcs marginal corporate tax rate is 30%.

Required:

1. Determine the incremental earnings from the purchase of the new machinery.

2. Determine the free cash flow from the purchase of the new machinery.

3. If the appropriate cost of capital is 9.9%, compute the NPV of the purchase of the new machinery.