Nestle Corporation is considering expanding its production capacity by purchasing a new machine. The cost of the machine is $8 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $10,000 feasibility study to analyze the decision to buy the machine, resulting in the following estimates:

Marketing: Once the XC---750 is operating next year, the extra capacity is expected to generate $10 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 $5.5 million this year. As with Billinghams existing products, the cost of goods for the products produced by themachineis expectedto be 60% of their sale price. Theincreasedproductionwillalso require increased inventory on hand of $2 million during the life of the project. The increased production will require additional inventory of $1M, to be added in year 0 and depleted in year 12.

Human Resources: The expansion will require additional sales and administrative personnel at a cost of $2.5 million per year.

Accounting: The XC---750 will be depreciated via the straight---line method in years 112. The salvage value is $3.5 million. Receivables are expected to be 15% of revenues and payables to be 10% of the cost of goods sold. Billinghams marginal corporate tax rate is 35%.

Questions

1. Determine the incremental earnings from the purchase of the XC 750.

2. Determine the free cash flow from the purchase of the XC---750.

3. If the appropriate cost of capital for the expansion is 12%, please estimate whether the Project is worth investing or not. Please use all the project valuation techniques such as: MIRR, IRR, NPV, payback. Please discuss the result.