You run a perpetual encabulator machine, which generates revenues averaging $24 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 12%. Your firm's long-term borrowing rate is 9%.

Now you are approached by Studebaker Capital Corp., which proposes a fixed-price contract to supply raw materials at $12 million per year for 8 years.

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

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.)

Find the Present Value:

With contract$

Without contract$