A tyre manufacturing company is planning to replace its old tyre making machinery with more modern equipment. The new equipment costs 100m and it will be paid for, in a single payment. The company expects to sell its old machinery for 10m at the time of the purchase of the new machinery. The new equipment is expected to years, and to cut the manufacturing costs from the current level of 80 to 40 per tyre. The company expects its sales to be 0.5m tyres per year (a) Ignoring tax and assuming a discount rate of 12% per annum, calculate the net present value of the replacement plan. State any assumptions you make and whether this criterion is in favour of the plan to replace the old machinery. [4 marks] (b) Suppose that the management of the company is uncertain both about the future sales, and about the useful life of the new equipment. Alternative forecasts for these variables are provided in the following table: Pessimistic Optimistic Expected 0.5 Sales (millions of tyre) Economic life (years) 0.4 0.7 13 10 Carry out a sensitivity analysis for the project and comment on your results. (6 marks]