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Buckingham Packaging is considering expanding its production capacity by purchasing a new machine,

the XC$-750.$ The cost of the XC$-750$ is $$3\mathrm{.}00$ million. Unfortunately, installing this machine will take several

months and will partially disrupt production. The firm has just completed a $$50,000$ 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 $$12\mathrm{.}0$ 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$ million this year $($year $0).$

Once the machine is operating next year, 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 require additional inventory on hand of

$$1\mathrm{.}5$ 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$-750$ has a CCA rate of $45\%$ and no salvage value is expected. The firm expects

receivables from the new sales to be $12\%$ of revenues and payables are expected to be $10\%$ of the cost of

goods sold. Buckingham's marginal corporate tax rate is $28\%.$

c$.$ If the appropriate cost of capital for the expansion is $14\%,$ compute the NPV of the purchase $($including all

CCA tax shield effects$).($Hint: when calculating the NPV$,$ you should calculate the free cash flows excluding

CCA tax shields then add the PV CCA tax shields to get the NPV$.)$

d$.$ While the expected new sales will be $$12\mathrm{.}0$ million per year from the expansion, estimates range from

$$9,600,000$ to $$14,400,000.$ What is the NPV in the worst case? In the best case?

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