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Question 4 The management of Langdale Mill is considering replacing a number of old looms in the mill's weave room. The looms to be replaced
Question 4 The management of Langdale Mill is considering replacing a number of old looms in the mill's 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 once 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. Description Machinery/related equipment Removal cost of old looms/site preparation Salvage value of old looms Annual sales increase with new looms Annual labour Annual O&M CCA Project life Salvage value Alternative 1 Alternative 2 $2,100,000 30,000 60,000 8,000,000 250,000 1,000,000 DB(30%) 8 years 160,000 1,000,000 50,000 60,000 7,500,000 400,000 1,500,000 DB(30%) 8 years 60,000 The undepreciated capital costs of all old looms are negligible. The corporate executives feel that various investment opportunities available for the mill will guarantee a rate of return on investment of at least 15%. The mill's marginal tax rate is 40% (a) Which alternative is better? (Use incremental IRR method) (b) Perform a sensitivity analysis on the project's data, varying the net operating revenue, labour cost, annual O&M cost, and the MARR. Assume that each of these variables can deviate from its base case expected value by 10%, by 20%, and by 30%. (c) From the results of part (b), prepare sensitivity diagrams and interpret the results
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