Question

Excel Spreadsheet Exercise                                                                            

Assume that Monsanto Corporation is considering the renovation and/or replacement of some of its older and outdated carpet-manufacturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company’s finance department has compiled pertinent data that will allow it to conduct a marginal cost–benefit analysis for the proposed equipment replacement.                                                    

• The cash outlay for new equipment would be approximately $600,000.                              
• The net book value of the old equipment and its potential net selling price add up to $250,000.     
• The total benefits from the new equipment (measured in today’s dollars) would be $900,000.
• The benefits of the old equipment over a similar period of time (measured in today’s dollars) would be $300,000.                                                          

To do                                                  

Create a spreadsheet to conduct a marginal cost–benefit analysis for Monsanto Corporation, and determine the following:                                                          

a.         The marginal (added) benefits of the proposed new equipment.                                            

b.         The marginal (added) cost of the proposed new equipment.                                      

c.         The net benefit of the proposed new equipment.                                            

d.         What would you recommend that the firm do? Why?                                               

                                                            

Benefits with the new equipment                                                        ___________

Less: Benefits with the old equipment                                                ___________

     (1) Marginal (added) benefits of the New Equipment                   ___________                          

                                                            

Cost of new equipment                                                                       ___________

Less:  Proceeds from the sale of the old equipment                           ___________

     (2) Marginal (added) costs of the New Equipment                        ___________                          

                                                            

             Net benefit (1) - (2)                                                              ____________                        

                                                

Answer 1

Answers a,b and c:

Answer d:

Recommendation:

Monsanto Corporation should purchase the new equipment and replace.

Reason:

The replacement decision will add net benefit of $250,000