Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.66 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 $10.15 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 70% 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 $1.94 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%. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC-900 is $4.07 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.

a. What kind of real option does the XC-900 machine provide to Billingham?

b. If Billingham knows that it can sell the XC-750 to another firm for $2.05 million in two years, what kind of real option would that provide?