In: Finance
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.