Mutually Exclusive Projects Considered: 1) 2) Status Quo (A) - Continue to use existing own equipment and supplement production capacity by leasing additional equipment. Alternative (B) - Purchase new plant and equipment. No leasing required if the replacement is undertaken. Business Operations Details Old Plant and Equipment New Plant and Equipment Current book value Acquisition cost $2,000,000 Remaining life (years) 5 Life (years) 5 Variable costs 60% of sales Variable costs 55% of sales Leasing costs $280,000 Leasing costs SO Associated operating expenses Insurance $200,000 $35.000 Associated operating expenses $120,000 Insurance $20.000 Annual depreciation Accounting salvage value Fully depreciated SO Expected salvage value if sold today $100,000 (so it sold 5 years later) Annual depreciation Accounting salvage value Expected salvage value $400,000 SO $400,000 The corporate tax rate is 30% and the required rate of return is estimated to be 10% for your company. The rates of return given are in real terms. The projected inflation rate is 4%. All expenses and costs are expected to grow at the same rate as inflation. Sales Projections (already adjusted for inflation): Estimated sales with existing fleet (s. Millions) Estimated sales with new fleet (s. Millions) Sensitivity Analysis to be Undertaken: 1) Discount rates at: 10% 12% 17% 2) Sales scenarios: sales increase by 10% each year sales decrease by 10% each year Year 1 2 3 4 5 5.5 6.0 6.7 6.5 6.3 7.2 7.5 8.0 8.0 8.0