Capital Budgeting Analyst

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:

1.  The marginal (added) benefits of the proposed new robotics is $______________

2.  The marginal (added) cost of the proposed new robotics is $__________________

3.  The net benefit of the proposed new robotics is $______________________

4.  Ken Allen should recommend that the company: (Select the best answer below)

a. to not replace the existing robotics because the net profit is positive

b. replace the existing robotics because the net profit is positive

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

a. What will the energy consumption of the new robotics.

b. Make sure sunk costs are included.

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

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

2. ESSAY QUESTION: What does it mean to say that managers should maximize shareholder wealth “subject to ethical constraints”? What ethical considerations might enter into decisions that result in cash flow and stock price effects that are less than they might otherwise have been?

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