Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.68 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 operating next year, the extra capacity is expected to generate $ 10.05 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 71% of their sale price. The increased production will also require increased inventory on hand of $1.07 million during the life of the project. The increased production will require additional inventory of $1.07 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 will be depreciated via the straight-line method in years 1 and 10. Receivables are expected to be 15% of revenues and payables to be 11% of the cost of goods sold. Billingham's marginal corporate tax rate is 15%.

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 $ 10.05 million per year from the expansion, estimates range from $ 7.95 million to $ 12.15 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 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 $ 3.98 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 $ 10.05 million expected for the XC-750) per year in those years would justify purchasing the larger machine?