Question
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9 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 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 $4. 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) | 0.4 | 0.5 | 0.7 |
Manufacturing cost with new machinery (dollars per welt) | 6 | 4 | 3 |
Economic life of new machinery (years) | 7 | 10 | 13 |
Conduct a sensitivity analysis of the replacement decision, assuming a discount rate of 12% and enter the Equivalent Annual Cost Savings in the table below. Rustic Welt does not pay taxes.
Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated with a minus sign.
Please get the correct answers for all parts of the question where it is red with an X
Problem 10-4 Sensitivity analysis The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9 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 $4. However, as the following table shows, there is some uncertainty both about future sales and about the performance of the new machinery: Conduct a sensitivity analysis of the replacement decision, assuming a discount rate of 12% and enter the Equivalent Annual Cost Savings in the table below. Rustic Welt does not pay taxes. Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated with a minus signStep by Step Solution
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