Question
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9.2 million (the existing equipment
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9.2 million (the existing equipment has zero salvage value). The attraction of the new machinery is that it is expected to cut manufacturing costs from their current level of $8 a welt to $5.6. However, as the following table shows, there is some uncertainty both about future sales and about the performance of the new machinery: |
Pessimistic | Expected | Optimistic | |
Sales, millions of welts | 0.6 | 0.7 | 0.9 |
Manufacturing cost with new machinery, dollars per welt | 6.2 | 5.6 | 3.2 |
Economic life of new machinery, years | 5 | 8 | 11 |
Calculate the annual cost savings of the expected scenario. Assume a discount rate of 14%. Rustic Welt does not pay taxes. (Do not round intermediate calculations. Round "PV Factor" to 4 decimal places and the final answer to 2 decimal places.) |
Annual cost savings | $ |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started