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 $535
comma 000535,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits
of $379 comma 000379,000 (also in today's dollars) over that same time
period. An initial cash investment of $
214 comma 000$214,000 would be required to install the new equipment. The manager estimates that the existing robotics
can be sold for $ 65 comma 000$65,000.
Show how Ken will apply marginal cost-benefit analysis techniques to
determine the following:
a. The marginal (added) benefits of the proposed new
robotics.
b. The marginal (added) 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?
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