You are budget analyst at Global Motors and have been asked to evaluate the foll

Question

You are budget analyst at Global Motors and have been asked to evaluate the following proposal. The company is considering replacing its existing metal stamping press with a new fully automated press for its luxury car line. If done, this would produce future savings valued TODAY at $350,000. The new automated stamping machine requires an initial investment of $405,000 and the exisiting production equipment can be salvaged or sold for $85,000. Use marginal cost-benefit analysis to determine the following:

a. The marginal (incremental) benefit of the proposed new robotics

b. Marginal (incremental) cost of the new robotics

c. Net benefit of proposed new robotics.

d. Should you recommend the new robotics system? Why or why not?

Explanation / Answer

The question clearly states that the automated press would produce future savings worth $350,000 at Present Value(PV).

a) Thus the marginal(incremental) benefit of the proposed new robotics = $350,000
b) Marginal(incremental) cost of the new robotics = Initial Investment - Salvage value of production equipment
= $405,000 - $85,000 = $320,000
c) Net benefit of proposed new robotics = [marginal(incremental) benefit] - [Marginal(incremental) cost]
= $350,000 - $320,000 = $30,000
d) The new robotics system is definitely recommended, this is because the Net Benefit of proposed new robotics is positive (As derived in question (c)).

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