7. The Rustic Welt Company is proposing to replace its old welt-making 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 about both the future sales and the performance of the new machinery: Sales, million welts Manufacturing cost, $ per welt Life of new machinery, years Pessimistic 14 6 I Expected 5 1 10 Optimistic 7 3 13 a) What is the expected NPV of this replacement decision assuming a discount rate of 12% and no taxes? (Hint: Consider the incremental savings, not the expected cash flows and assume that the expected scenario is realized) b) Conduct a sensitivity analysis of the replacement decision if the sales are realized as in the pessimistic scenario assuming a discount rate of 12% and no taxes (Hint: Consider the incremental savings, not the expected cash flows)