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Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC750. The cost of the XC-750 is $2.85 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $47,000 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 $10.20 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 $5.08 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 72% of their sale price. The increased production will also require increased inventory on hand of $1.04 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 $1.91 million per year. - Accountina: The XC-750 will be debreciated via the straiaht-line method over the 10 -vear life of the machine. The firm a. Determine the incremental earnings from the purchase of the XC-750. Calculate the incremental earnings from the purchase of the XC-750 below (with vs. without XC?750): (Round to the nearest dollar.) Incremental Effects (with vs. without XC-750) - 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 15% of revenues and payables to be 9% of the cost of goods sold. Billingham's marginal corporate tax rate is 21%. a. Determine the incremental earnings from the purchase of the XC-750. b. Determine the free cash flow from the purchase of the XC750. c. If the appropriate cost of capital for the expansion is 10.1%, compute the NPV of the purchase. d. While the expected new sales will be $10.20 million per year from the expansion, estimates range from $8.25 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 breakeven 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 $4.04 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3 through 10. What level of additional sales (above the $10.20 million expected for the XC-750) per year in those years would justify purchasing the larger machine

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