Marginal cost-benefit analysis and the goal of the firm. Ken Allen, capital budg
ID: 1201499 • Letter: M
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 produce total benefits of $595,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $418,000 (also is today's dollars) over that same time period. An initial cash investment of $238,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $73,000. Show Ken will apply marginal cost-benefit analysis techniques to determine the following:
a. The marginal (added) benefits of the proposed new robotics
b. The marginal (added) 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)
Explanation / Answer
a. The marginal (added) benefits of the proposed new robotics: (595000-418000) = $1,77,000
b. The marginal (added) cost of the proposed new robotics: (238000-73000) = $ 1,65,000
c. The net benefit of the proposed new robotics: 1,77,000 - 1,65,000 = 12,000
d. What should Ken recommend that the company do? Why?: to install new robots as they are generating beneift