The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9.2 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 $8.20 a welt to $4.20. 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) 0.6 0.7 0.9

Manufacturing cost ($ per welt) 6.20 4.20 3.20

Life of new machinery (years) 12 15 18

Conduct a sensitivity analysis of the replacement decision assuming a discount rate of 12%. Rustic does not pay taxes. Calculate the NPV.

NPV Replacement decisions

Pessimistic Expected Optimistic

Sales (million welts)

Manufacturing cost ($ per welt)

Life of new machinery (years)