Question

le CFO of Basty Corporation asked you to evaluate a capital budgeting proposal. The firm Intends to replace a machine with one that offers more production capacity. The unit manager ing an old machine with a new one will produce total benefits of $600,000 next 5 years. The existing machine (old one) produce benefits of $450,000 over the same period. An initial cash investment of $250,000 would be required to install the new le. Also, the manager estimates that the existing (old) machine can be sold at a price of $85,000. Required: Apply the Principle of Marginal Cost-Benefit Analysis techniques to answer the following: A. Compute the added marginal benefits for the proposed new machine B. Compute the marginal added costs of the proposed new machine. C. Compute the Net Benefit of the proposed new machine. D. What should you recommend the company to do? Why?

Answer 1

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Calculation of Added Marginal benefits : - L As a result of Le replacement of old machine Total benefits produced by new Machine - Total benefits produced by Old Machine Added Marginal benefits $ 600,000 a 450,000 $ 150,000 - Cost as a nesult of Calculation of replacement Marginal Added of OLD Machine Initial Cash investment in new machine Sale price of old machine Added Marginal Costs $250,000 $ 85,000) $ 165,000) Calculation of Net benefit of Proposed Machine Added (+) Added Marginal benefits . Marginal Costs Net benefit $ 150,000 $ 165,000 $-15000 Recomendation The CFO of Basty Corporation should not go for replace ment or old Machine because the Net Benefit in re placement is negative.