Morgan company is considering expanding its production capacity by purchasing a new machine, the AC250. The cost of the AC250 is $1 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study to analyze the decision to buy the AC250, resulting in the following estimates:

Marketing: Once the AC250 is operating next year, the extra capacity is expected to generate $10 million per year in additional sales, which will continue for the 5-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 AC250 is expected to be 50% of their sale price.

Human Resources: The expansion will require additional sales and administrative personnel at a cost of $0.4 million per year.

Accounting: The AC250 will be depreciated via the straight-line method over the 5-year life of the machine. The firm expects receivables from the new sales to be 20% of revenues and payables to be 10% of the cost of goods sold. The increased production will require additional inventory on hand of $1.2 million to be added in year 0 and depleted in year 5.

Morgan companys marginal corporate tax rate is 20%. The appropriate cost of capital for the expansion is 9.9%.

Required

Assume you are financial consultant of Morgan company. Draft a report to Alex (Financial controller), and answer the following questions:

According to the feasibility study report, the expected new sales will be $10.15 million per year from the expansion, estimates range from $8.20 million to $12.1 million. What is the NPV in the worst case? In the best case?

200 words please