Managerial Finance

Problem 1-4 (Marginal Cost-Benefit Analysis and the Goal of the Firm)

a. The marginal (added) benefits of the proposed new robotics.

- To find out what are the marginal (added) benefits of the proposed new robotics, you will need to subtract what the proposed benefits are by the new robotics ($560,000) by the benefits that would be produced by the existing robotics ($400,000).

$560,000

- $400,000

$160,000

- The marginal (added) benefits of the proposed new robotics are $160,000.

b. The marginal (added) cost of the proposed new robotics.

To find out what is the marginal (added) cost of the proposed new robotics, you will need to subtract the initial cash investment that is required to install the new equipment ($220,000) by the estimated value of the existing equipment ($70,000).

$220,000

- $70,000

$150,000

- The marginal (added) cost of the proposed new robotics is $150,000.

c. The net benefit of the proposed new robotics.

- To find out what is the net benefit of the proposed new robotics, you will need to subtract the marginal (added) benefits ($160,000) by the marginal (added) cost ($150,000) of the proposed new robotics.

$160,000

- $150,000

$10,000

- The net benefit of the proposed new robotics is $10,000.

d. What should Ken Allen recommend that the company do? Why?

- Ken Allen should recommend that the company consider the proposal of replacing the robotics used on the heavy truck gear line. Ken Allen should let management know that he personally recommends that the company replace the existing robotics because he applied the marginal cost-benefit analysis techniques to this situation and he has determined that the company will not lose money but rather gain $10,000 through the acquired benefits of the new robotics.

Problem 1-4 (Cont.)

e. What factors besides the costs and benefits should be considered before the final decision is made?

- Other than looking at the cost and benefits to make the final...