Bauer Industries is considering purchasing a new machine, the XD-750, which would allow it to expand its production capacity. The cost of the XD-750 is $2.75 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 XD-750, resulting in the following estimates:

Marketing: Once the XD-750 is operating next year, the extra capacity is expected to generate $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 million this year. Once the machine is operating next year, the cost of goods for the products produced by the XD-750 is expecte4d to be 70% of their sales price. The increase production will require additional inventory on hand of $1 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 XD-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 15% of revenues and payables to be 10% of the cost of goods sold. Billinghams marginal corporate tax rate is 35%.

a. Determine the incremental earnings from the purchase of the XD-750.

b. Determine the free cash flow from the purchase of the XD-750.

c. If the appropriate cost of capital for the expansion is 10%, compute the NPV of the purchase.

d. Investigate the sensitivity of the NPV to fluctuations of the cost of capital. Allow cost of capital to increase from 8% to 15% with 1% increment. Using Data Table function, compute the value of the NPV for each value of the cost of capital and graph the NPV profile (the NPV values (on the Y-axis ) against the values of the cost of capital (on the X-axis)). Please use Data Table function

e. While the expected sales will be $10 million per year from the expansion, estimates range from $8 million to $12 million. What the NPV in each case? Check all possible values in the given range with the increment of $500. Use Data Table function

f. What is the break-even level of new sales from the expansion? What is the break-even level for the cost of goods sold? Use Solver function

g. Billingham could instead purchase the XD-900, which offers greater capacity. The cost of the XD-900 is $4 million. 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 million expected for the XD-750) per year in those years would justify purchasing the larger machine? Use Solver function