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.

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