Question

Marginal cost-benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $524,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $434,000 (also in today's dollars) over that same time period. An initial cash investment of $209,600 would be required to install the new equipment The manager estimates that the existing robotics can be sold for $77,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following: a. The marginal benefits of the proposed new robotics. b. The marginal cost of the proposed new robotics. c. The net benefit of the proposed new robotics. d. What should Ken recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made? a. The marginal (added) benefits of the proposed new robotics is $ . (Round to the nearest dollar.) b. The marginal (added) cost of the proposed new robotics is $ . (Round to the nearest dollar.) c. The net benefit of the proposed new robotics is $ . (Round to the nearest dollar.) d. Ken Allen should recommend the company (Select the best answer below.) O O to not replace the existing robotics because the net profit is negative. to replace the existing robotics because the net profit is negative. e. Other factors that should be considered before the final decision is made are: (Choose all that apply.) A. What will be the energy consumption of the new robotics. B. Whether even better robotics may be available in a short while. c. Whether there will be additional training necessary with the new robotics D. Make sure sunk costs are included.

Answer 1

Giren 1) New Equipment would generate benefit of $524,000 a - next syears 2) Existing robotics would generate benefit of $434.000 over That same period 3) Initial Cash investment for new robotic $201.600 4) Existing sobot's resale ralue $77,000 a) Marginal benefits of the proposed New robotics Sehun cover syears New Equipment Benefit - Existing robotic, bengits -> $534,000 - $434,000 = $90,000 b) The Marginal cost of the proposed new robotics E) Inistal Cash investment - Existing sobots resale value 2) $209,600 - $77000 >> $132.600 value c) Not benefit of proposed New robotig = Total bengits - Initial Cash Investment & Existing robot sesal > $524,000 - $209,600 + $77,000 >> $391,400

should kon recommend d what solun Since to not to the net profit bengit is negative, it y advisable replace the existing robots Net bengity of Newrobating - benefit of Existing robotit . 391.400 - 434,000 = C42,600 He should consider the factor of B) whether even beter robotic, may be available ma shost while. Assumption, Giren benefits of Existing gobotic are of - - net in value