Question

Safad Department Stores is applying marginal-cost benefit analysis to decide whether to replace a computer system. The benefits of the new computer system are $20,000 and the cost of this computer system is$15,000. while the benefits and costs from the old computer system are $5,000 and t $12,000 respectively. the salvage value of the old computer is $3,000.

Net Benefits ________

Answer 1

$15,000

Marginal Benefits __________

Answer 2

Choose...

Marginal Costs ________

Answer 3

Choose...

What do you recommend ___________

Answer 4

Choose...

Answer 1

1.

Net Benefits in choosing new computer system :-

Benefit = 20000

Cost = 15000

Net Benefit = 20000-15000 = 5000

2.

Marginal Benefits in choosing new computer system :-

Incremental benefit = 20000-5000 = 15000

Incremental cost = 15000-3000 = 12000

Incremental (Marginal) Benefit = 15000-12000 = 3000

(Note : Cost of old computer is irrelevant in decision meking as it is sunk cost)

3.

Recommendation :-

New computer system should be choosen and old should be discarded.

4.

Choose New Computer System