4. Sensitivity analysis (S10.1) The Rustic Welt Company is proposing to replace its old weltmaking machinery with
Question:
4. Sensitivity analysis (S10.1) The Rustic Welt Company is proposing to replace its old weltmaking machinery with more modern equipment. The new equipment costs $9 million (the existing equipment has zero salvage value). The attraction of the new machinery is that it is expected to cut manufacturing costs from their current level of $8 a welt to $4. However, as the following table shows, there is some uncertainty both about future sales and about the performance of the new machinery:
Pessimistic Expected Optimistic Sales (millions of welts) 0.4 0.5 0.7 Manufacturing cost with new machinery (dollars per welt) 6 4 3 Economic life of new machinery (years) 7 10 13 Conduct a sensitivity analysis of the replacement decision, assuming a discount rate of 12%.
Rustic Welt does not pay taxes.
Step by Step Answer:
Principles Of Corporate Finance
ISBN: 9781264080946
14th Edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen, Alex Edmans