The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $10 million and the company expects to sell its old equipment for $1 million. 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:

Conduct a sensitivity analysis of the replacement decision, assuming a discount rate of 12 percent. Rustic Welt does not paytaxes.

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Expected Optimistic Pessimistic Sales, millions of welts Manufacturing cost with new machinery, dollars per welt Economic life of new machinery, years .5 .7 4. 3. 10 13