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 | .4 | .5 | .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%. Rustic Welt does not pay taxes.
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