Question

and P1-4 (similar to) Question Help 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 $593,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $369.000 (also in today's dollars) over that same time period. An initial cash investment of 5237 200 would be required to install the new equipment . The manager estimates that the existing robots can be sold for $54,000. 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 kon 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)

Answer 1

Answer:

a) The Marginal Benefits of the Proposed New Robotics :

Therefore Marginal Benefits of the proposed new robotics

= Total Benefits with New Robotics over 5 years - Total Benefits with Existing Robotics over the same period

= $ 593,000 - $ 359,000

= $ 234,000

b) The Marginal Cost of the Proposed New Robotics :

Therefore Marginal Cost of the proposed new robotics

= Initial Cash investment required to purchase & install new equipment - Estimated Sale Price of Existing Robotics

= $ 237,200 - $ 54,000

= $ 183,200

c) The Net Benefit of the Proposed New Robotics :

Calculated Earlier Result => Marginal Benefits = $ 234,000

   Marginal Cost = $ 183,200

Therefore Net Benefit of the proposed new robotics

= Marginal Benefit of new proposed robotics - Marginal Cost of ne proposed robotics

= $ 234,000 - $ 183,200

= $ 50,800

d) Ken Should Recommend replacing the existing robotics with the new robotics because as per the replacement decision with new robotics results in Net Benefits of proposed new robotics i.e., $ 50,800.

e) Before Making Final Decision based on cost and benefits there are some other factors that should be considered :

• If Net Benefits relates to savings in salaries and wages by terminating employment , effect of such terminations, regulatory   requirements.
• Effect on Products Quality.
• Impact due to requirements regarding compliance,if any.
• Environmental Impact Analysis need to be completed for evaluation of environmental impact.
• Investment with interest and understanding or technology of new robotics