Question

2 LG 4 P1-4 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 $560,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in today's a4 dollars) LG6 over that same period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $70,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following: ida. The marginal benefits of the proposed b. The marginal costs of the proposed c. The net benefit of the proposed 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? new robotics. new robotics. robotics. new

Answer 1

sclution a) Re quizud Hod orginal Benfidhk ot the proposcd new Yobotics : ranginal bene fit Bene fih Placing obotics on with Existing obotics Beneft 560)000 - 400.000 [torginal beneft IGOO00 ) Harginal cost ot the proposed Tcbotic s iostallalion ot robohic ro ginal cost : cost - prauds rom Salı of existing Yobotic S 10.000 220,000 156.000 Horginal cost 15o.000 c) Net Beni ot the propased new obotics: Net enefith Mrl BeneliHonginal cost I60 000-150 000 0000 Nt Benst 2

d) ken ucomnend to the comoany mavginal be Sinu saplacament the on of robotics is so the compan 10000 . uplace the 1obotics and install the can One e) Other tactors to be consideud Thee au Ce7tain tactors dsch kauld be chi making dc cision beside bendfith anaksis considczac Cost and be as follows Some ot those tactors can 1t the alternative invdlves investment thun investment shculd be the inteust consideed in decision making The incument in other cost either izac be consídued uhile O Vaiabl Should making decisions Reluvanta ot techodogof the new considud the procluct Shoufd be