Problem $9-16$ Betas and operating leverage

You run a perpetual encabulator machine, which generates revenues averaging $$20$ million per year. Raw material costs are $50\%$ of revenues. These costs are variable$-$they are always proportional to revenues. There are no other operating costs. The cost of capital is $9\%.$ Your firm's long$-$term borrowing rate is $6\%.$

Now you are approached by Studebaker Capital Corporation, which proposes a fixed$-$price contract to supply raw materials at $$10$ million per year for $10$ years.

a$.$ What happens to the operating leverage and business risk of the encabulator machine if you agree to this fixed$-$price contract?

b$.$ Calculate the present value of the encabulator machine with and without the fixed$-$price contract. Note: Do not round intermediate calculations. Enter your answers in dollars not in millions. Round your answers to the nearest whole dollar amount.

Complete this question by entering your answers in the tabs below.

Calculate the present value of the encabulator machine with and without the fixed$-$price contract.

Note: Do not round intermediate calculations. Enter your answers in dollars not in millions, Round your answers to the nearest whole dollar amount.

$\backslash$table$[[,$Present Value$],[$With contract,$$,42,482,996$