Reference no: EM132538478

A co wants to replace its old machinery with new one with expected life of 8 year, salvage value are $70,000 for large Machine and $45,000 for small Machine. As per Market research there is a 60% probability that demand will be high throughout the useful life of the Machine, and a 35% probability that demand will be low throughout the useful life of the machine ( for the product it produces). Lastly, Co. decides to consider a 5% probability that in case of non operation of machine due to some other business constraint.

Cost of Large Machine = $700,000 + $50000( installation and shipping costs) small Machine = $450,000+ $45,000( Installation +Shipping). Depreciation 20%/annum There is also an initial increase in net working capital of $60,000 for the large model, and $30,000 for the small model. The net working capital is recoverable at the end of their useful life. In the event of high demand, the company expects a yearly operating revenue of $1,000,000 for the large model, and a yearly operating revenue of $450,000 for the small model. If the demand is low, yearly operating revenue is forecasted to be $400,000 for both the large model andthesmallmodel. Annual Operating Cost is to be 50% of the operating revenue for the large model and 45% of the operating revenue for the small model. In the event that the No business , operating revenue is to decrease to zero. Fixed operating costs associated with operating the large model are $100,000 per year, and that for small model are $65,000. In addition, if the large model is preferred over the small model, the company needs to rent an additional warehouse to store the large Machine. A new warehouse's rental cost is expected to be $100,000 per year. You have recently evaluated the capital structure of the company and believes that it is operating at the optimal level of 60% debt and 40% equity. The weighted average cost of capital (WACC) from this capital structure is 12.5%. You would also like to understand how sensitive your capital budgeting decisions are due to changes in WACC. As such, in addition to determining which model to invest, you want to investigate the e?ects of WACC on NPV and the cross-over rates of the large and small models when demands are high and when demands are low , also calculate:

(1) the various cash ?ows based on the di?erent scenarios and (2) the sensitivity analysis using di?erent WACC and the calculation of cross-over rates.