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 truck gear line will produce total benefits of ​$560 comma 000 ​(in today's​ dollars) over the next 5 years. The existing robotics would produce benefits of ​$400 comma 000 ​(also in​ today's dollars) over that same time period. An initial cash investment of $ 220 comma 000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $ 70 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?

Answer 1

Answer:

1) The marginal​ (added) benefits of the proposed new robotics.

560,000 - 400,000 = 160,000

2) The marginal​ (added) cost of the proposed new robotics.

220,000 - 70,000 = 150,000

3) The net benefit of the proposed new robotics.

160,000 - 150,000 = 10,000

4) What should Ken recommend that the company​ do? Why?

Replace the existing robotics because the net profit is positive

5) What factors besides the costs and benefits should be considered before the final decision is​ made?

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

B. Whether even better robotics may be available in a short while.

C. What will be the energy consumption of the new robotics.