Billingham Packaging is considering expanding its production capacity by purchasing a new? machine, the? XC-750. The cost of the? XC-750 is $2.84 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 the? XC-750, resulting in the following? estimates:

?Marketing: Once the? XC-750 is operational next? year, the extra capacity is expected to generate

$ 10.00

million per year in additional? sales, which will continue for the? ten-year life of the machine.

?Operations: The disruption caused by the installation will decrease sales by

$ 4.93 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 69 %

of their sale price. Theincreased production will also require increased inventory on hand of $1.03 million during the life of the? project, including year 0 and depleted in year 10.

Human? Resources: The expansion will require additional sales and administrative personnel at a cost of $2.08 million per year.

?Accounting: The? XC-750 will be depreciated via the? straight-line method over the? ten-year life of the machine. The firm expects receivables from the new sales to be 15 % of revenues and payables to be 11% of the cost of goods sold.? Billingham's marginal corporate tax rate is 35%.

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 10.3 % compute the NPV of the purchase.d. While the expected new sales will be $ 10.00 million per year from the? expansion, estimates range from $ 8.05 million to $ 11.95 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? If the firm believes that sales will not? increase, but costs would be reduced by purchasing the new? machine, what is the? break-even 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 $ 3.99million. The extra capacity would not be useful in the first two years of? operation, but would allow for additional sales in years? 3-10. What level of additional sales? (above the $10.00 million expected for the? XC-750) per year in those years would justify purchasing the larger? machine?