Please help solve Buckingham Packaging is considering expanding its production capacity by purchasing a

new machine, the XC$-750.$ The cost of the XC$-750$ is $$2\mathrm{.}25$ million. Unfortunately, installing

this machine will take several months and will partially disrupt production. The firm has just

completed a $$50,000$ feasibility study to analyze the decision to buy the $xC-750,$ resulting in

the following estimates:

Marketing: Once the XC$-750$ is operating next year, the extra capacity is expected to

generate $$10\mathrm{.}5$ 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$ million this

year $($year $0).$ Once the machine is operating next year, the cost of goods for the products

produced by the XC$-750$ is expected to be $70\%$ of their sale price. The increased production

will require additional inventory on hand of $$2\mathrm{.}0$ million, to be added in year $0$ and depleted in

year $10.$

Human Resources: The expansion will require additional sales and administrative personnel

at a cost of $$2$ million per year.

Accounting: The XC$-750$ has a CCA rate of $35\%$ and no salvage value is expected. The firm

expects receivables from the new sales to be $10\%$ of revenues and payables are expected to

be $10\%$ of the cost of goods sold. Buckingham's marginal corporate tax rate is $33\%.$

c$.$ If the appropriate cost of capital for the expansion is $12\%,$ compute the NPV of the

purchase $($including all CCA tax shield effects$).($Hint: when calculating the NPV$,$ you should

calculate the free cash flows excluding CCA tax shields then add the PVCCA tax shields to

get the NPV$.)$

d$.$ While the expected new sales will be $$10\mathrm{.}5$ million per year from the expansion, estimates

range from $$8,400,000$ to $$12,600,000.$ What is the NPV in the worst case? In the

best case?