Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to ev

Question

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 todays dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in todays 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 costbenefit analysis techniques to determine the following:

Explanation / Answer

replacing $560,000
existing $400,000
investment $220,000
sold existing $70,000
net extra profit after 5 year
=56-40-22+7-interest on(220,000)
=1000-interest on(220,000)

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