Question 1 The management of a company is considering replacing a number of old looms in the mills weave room. The looms to be replaced are two 220-cm President looms, sixteen 135-cm President looms, and twenty-two 185-cm Draper X-P2 looms. The company may either replace the old looms with new ones of the same kind or buy 21 new shutterless Pignone looms. The first alternative requires the purchase of 40 new President and Draper looms and the scrapping of the old looms. The second alternative involves scrapping the 40 old looms, relocating 12 Picanol looms, and constructing a concrete floor, plus purchasing the 21 Pignone looms and various related equipment. Following are the revenue and expense predictions: Description............................................ Alternative 1............... Alternative 2 Machinery/related equipment................... $2,000,000...................$1,050,000 Annual revenues due to the new looms.....$2,100,000................. $1,700,000 Annual labour cost.................................... $240,000..................... $380,000 Annual O&M cost...................................... $900,000......................$700,000 CCA Rate..........................................................30%........................... 30% Project life...................................................8 years......................... 8 years Salvage value.............................................$520,000.....................$260,000

The corporate executives feel that various investment opportunities available for the mill will guarantee a rate of return on investment of at least (MARR) 11%. The mills marginal tax rate is 35%. a] Using NPW analysis, which alternative is better? b] For Alternative 1, perform a sensitivity analysis on this alternatives data, varying independently the: annual revenues, labour cost, and annual O&M cost. Assume that each of these variables can independently deviate from its base value (given in the previous table) by 20%. For each case, you may use NPW to test sensitivity. Analysis of simultaneous change in variables is not required. c] From the results of part [b], prepare sensitivity diagrams and identify the most influential variable. d] Calculate the Annual labour cost of Alternative 1 which makes the two alternatives equivalent (NPW1=NPW2). (Hint: [a] do not forget to calculate income taxes and disposal tax effects [b] You can you spreadsheet applications if you communicate your solution in a way which enables the teaching assistant to independently replicate your final answer [c] Please assume that the given MARR is market interest rate and all dollars are current).