Question

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 $574 comma 000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $367 comma 000 (also in today's dollars) over that same time period. An initial cash investment of $ 229 comma 600 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $ 63 comma 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 $ nothing. (Round to the nearest dollar.) b. The marginal (added) cost of the proposed new robotics is $ nothing. (Round to the nearest dollar.) c. The net benefit of the proposed new robotics is $ nothing. (Round to the nearest dollar.) Other factors that should be considered before the final decision is made are: (Choose all that apply.) A. Make sure sunk costs are included. 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. What will be the energy consumption of the new robotics.

Answer 1

(a) The marginal benefits of the proposed new robotics is

=Benefits of new proposal - Benefits of existing proposal

=$574000- $367000

=$207000

(b)The marginal Cost of the proposed new robotics is

=Initial cash investment of new equipment - Estimated sale value of existing robotic

=$229600- $63000

=$166600

(c)The net benefit of the proposed new robotics is

=Marginal Benefit - Marginal Cost

=$207000- $166600

=$40400

(d)Ken should recommend to accept the proposal of replacing Robotics used on the heavy truck gear line. Because Margin of benefit is $40400.

(e) All the 4 (i.e A, B, C, D) factors should be considered before taking the final decision. If any amount spend on these 4 factors including interest(If applicable) to be considered to know weather the proposal is profitable or not.