Billingham Packaging is considering expanding its production capacity by purchasing a new? machine, the? XC-750. The cost of the? XC-750 is $ 2.81 million.?Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $47,000 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 $ 10.10 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 $ 5.04 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 68 % of their sale price. The increased production will also require increased inventory on hand of $ 1.03 million during the life of the? project, including year 0.

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

?Accounting: The? XC-750 will be depreciated via the? straight-line method over the? 10-year life of the machine. The firm expects receivables from the new sales to be 16 % of revenues and payables to be 9 % 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 10.1 % compute the NPV of the purchase.

d. While the expected new sales will be $ 10.10million per year from the? expansion, estimates range from $ 8.15  to $12.05 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? What is the breakeven 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 $ 3.94million. The extra capacity would not be useful in the first two years of? operation, but would allow for additional sales in years 3 through 10. What level of additional sales? (above the $ 10.10 million expected for the?XC-750) per year in those years would justify purchasing the larger? machine?