Hani Talal, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The

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Hani Talal, 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 US$560,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of US$400,000 (also in today's dollars) over that same time period. An initial cash investment of US$220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for US$70,000. Show how Hani 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 Hani Talal recommend that the company do? Why?
e. What factors besides the costs and benefits should be considered before the final decision is made?
Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...
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Related Book For  book-img-for-question

Principles of Managerial Finance

ISBN: 978-1408271582

Arab World Edition

Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix

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