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 period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the robotics can be sold for $70,000. Show how Ken would apply marginal cost-benefit analysis techniques to the determine the following:
The marginal (ADDED) benefits of the new proposed robotics.
The marginal (ADDED) cost of the new proposed robotics.
The net benefit of the new proposed robotics.
What should Ken recommend the company do? Why?
What factors besides the costs and benefits should be considered before the final decision is made?