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 $560,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in today's dollars) over that same time period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $70,000. 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 Allen recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made?
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 $560,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in today's dollars) over that same time period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $70,000. 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 Allen recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text: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 $560,000 (in today's
dollars) over the next 5 years. The existing robotics
would produce benefits of $400,000 (also in today's
dollars) over that same time period. An initial cash
investment of $220,000 would be required to install
the new equipment. The manager estimates that the
existing robotics can be sold for $70,000. 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 Allen 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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