You run a perpetual encabulator machine, which generates revenues averaging $36 million per year. Raw material costs are 50% of revenues. These costs are variablethey are always proportional to revenues. There are no other operating costs. The cost of capital is 15%. Your firms long-term borrowing rate is 12%.

Now you are approached by Studebaker Capital Corp., which proposes a fixed-price contract to supply raw materials at $18 million per year for 11 years.

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

	Operating leverage and business risk increases
	Operating leverage and business risk decreases

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

	Present Value
With contract	$
Without contract	$