Answered: a. The marginal (added) benefits of the…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1iM

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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 $584,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $398,000 (also in today's dollars) over that same time period. An initial cash investment of $233,600 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $62,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following:

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

b. The marginal (added) cost of the proposed new robotics is...........?

c. The net benefit of the proposed new robotics is........?

d. Ken Allen should recommend the company............? (Select the best answer below.)

A) replace the existing robotics because the net profit is positive.

B) do not replace the existing robotics because the net profit is positive.

e. Other factors that should be considered before the final decision is made are: (Choose all that apply.)

A. whether there will be additional training necessary with the new robotics.

B. the amount of energy consumption of the new robotics.

C. make sure sunk costs are included.

D. whether even better robotics may be available in a short while.

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