Question

he Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $10.4 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 $9.40 a welt to $5.40. However, as the following table shows, there is some uncertainty about both the future sales and the performance of the new machinery: Pessimistic Expected Optimistic Sales (million welts) 1.8 1.9 2.1 Manufacturing cost ($ per welt) 7.40 5.40 4.40 Life of new machinery (years) 4 7 10 Conduct a sensitivity analysis of the replacement decision assuming a discount rate of 8%. Rustic does not pay taxes. Calculate the NPV. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Enter your answers in dollars not in millions. Negative amounts should be indicated by a minus sign.)

Answer 1

Answer Use spreadsheet for the required Computations Enter values and formulas in the spreadsheet as shown on the image below. А Input в pessimistic I expected optimistic o sales million 10.4 Wells manfactiseng con Perwelt O ro ŏ Tlife of new , machinery, you e o ro output Nou of replacement decision Expedted anneell cost savings in milliong. ¢ssa Scanned with CamScanner nner

pta pessimistic Expected optirotic 19 Sales, million welts19 (pv (121, 10,1,0,0) í a pulias 10,10p) +95xwy 9 (PV12% 10,1,0,0) +0.784) marufactaxing cost spen (pu (anis.10,00)Compleurone to wood+ Cosentpvcera 101.)+(0*) welt Joan Lovcen no) + (05x2) (ipv (12.10,198)4 (osan) feudi 1. oktob)+(0545) (pv Ose. 10,104 (osma) (pv col2 10,000/4.5m (purchia voice)+60*** 9 He Life of New is unohtana 2% 13,1,00) +0.574) P12% 7,19,0)+10.5447 machinery years. pv (12% 7, 10,0))+(0.544) (pu(12.9. 10,1,0,0)) Hosxy) four Scanned with 9 1,0,0) CamScanne pe (pulo. 12 10,1,00) +oxu k pucole 13,1,0,0 105X4

Ophiseitd pesercentio esported 040 0.) $o $# Input -> ales, millise sellis radufacturing cost 0,70 3 1 $ por weet 12.00 10.00 → Life of new 17.00 machinery yours Output Nprofs seepoceront decision Expected annual sauros in millions pessinichid Espachet opkoristid I → Sales withicno webts $0.00 $0.41 $1.21 manufacturing cost $60.59 $8.41 | $8.90 | & peruste Life of now roachinery you? Post $060 $003 cs Scanned with CamScanner