The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment....

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The Rustic Welt Company is proposing to replace its oldwelt-making machinery with more modern equipment. The new equipmentcosts $10.8 million (the existing equipment has zero salvagevalue). The attraction of the new machinery is that it is expectedto cut manufacturing costs from their current level of $9.80 a weltto $5.80. However, as the following table shows, there is someuncertainty about both the future sales and the performance of thenew machinery: Pessimistic Expected Optimistic Sales (millionwelts) 2.2 2.3 2.5 Manufacturing cost ($ per welt) 7.80 5.80 4.80Life of new machinery (years) 11 14 17 Conduct a sensitivityanalysis of the replacement decision assuming a discount rate of8%. Rustic does not pay taxes. Calculate the NPV.

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ICInitial Cash Flow in million dollars1080ACurrent Cost per Welt980980980980980980980980980BNew Cost per welt780580480780580480780580480CABSaving per welt200400500200400500200400500Sales in million welt222222232323252525Annual Savings in Million dollar4408801100460920115050010001250CALCULATION OF PRESENT VALUE OF SAVINGSFOR LIFE OF See Answer

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The Rustic Welt Company is proposing to replace its oldwelt-making machinery with more modern equipment. The new equipmentcosts $10.8 million (the existing equipment has zero salvagevalue). The attraction of the new machinery is that it is expectedto cut manufacturing costs from their current level of $9.80 a weltto $5.80. However, as the following table shows, there is someuncertainty about both the future sales and the performance of thenew machinery: Pessimistic Expected Optimistic Sales (millionwelts) 2.2 2.3 2.5 Manufacturing cost ($ per welt) 7.80 5.80 4.80Life of new machinery (years) 11 14 17 Conduct a sensitivityanalysis of the replacement decision assuming a discount rate of8%. Rustic does not pay taxes. Calculate the NPV.