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The RW Company is proposing to replace its old welt-making machinery with more modern equipment. The...

The RW 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       

Calculate the annual cost savings of the expected scenario. Assume a discount rate of 12%. RW does not pay taxes.

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jeff jeffy answered 1 year ago
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