Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750.

Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is S2.71 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $48, 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 $4.91 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 74% of their sale price. The increased production will also require increased inventory on hand of $1.12 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 $1.96 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 10% of the cost of goods sold. Billingham's marginal corporate tax rate is 35%. Determine the incremental earnings from the purchase of the XC-750. Determine the free cash flow from the purchase of the XC-750. If the appropriate cost of capital for the expansion is 9.8%, compute the NPV of the purchase. While the expected new sales will be $10.10 million per year from the expansion, estimates range from $8.20 million to $12.00 million. What is the NPV in the worst case? In the best case? What is the break-even level of new sales from the expansion? What is the breakeven level for the cost of goods sold