An analyst has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on one of the business production lines will produce total benefits of $700,000 (in today’s dollars) over the next 5 years. The existing robotics would produce benefits of $500,000 (also in today’s dollars) over that same time period. An initial cash investment of $250,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $110,000. Using marginal cost–benefit analysis techniques, 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 Ken Allen recommend that the company do? Why?
2. Graph the flow of funds through the financial system using your own graph and explain it briefly.
