Thursday, September 1, 2011

Principle of Finance

The Role and Environment of Finance

                                          part-B & C

1.Marginal analysis and the goal of the firm ken allen,capital  budgeting analyst for Bally Gears,
Inc has been asked to evaluate a proposal. The manager of the automotive diviesion believes that  
replacing the robotics used on the heavy truck gear line will produce total benefits of TK. 560,000 (in today's the) over the next 5 years. The existing robotics would produce benefits of TK.400,000 (also in today's) over that same time period. An initial cash investment of TK.220,000 would be required to install the new equipment . The manager estimates that the existing robotics can be sold for TK.70,000. Show how ken will apply marginal analysis techniques to determine the following:
a.The marginal (added) cost of the proposed new robotics.
b.The marginal (added)benefits 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?
e.What factor besides the costs and benefits should be considered before the final decision is made?

Solution:
a.Marginal benefits=(New robotics-existing robotics)
                                =(5,60,000-4,00,000)
                                =TK.1,60,000
b.Marginal costs    =(Initial cash investment-sales of old robotics)
                                =(2,20,000-70,000)
                                =TK.1,50,000.
c.Marginal benefit =Marginal costs-Net benefits
                                =1,60,000-1,50,000
                                =TK.10,000
d.Ken should recommend that the  company replace the old robotics with the new robotics.The net benefit to shareholders is positive which should make the shareholders better off.
e.Ken should consider more than just net benefit.He should in corporate the important points of timing, cash flow, and risk, three important factors to determining the true impact on shareholder's wealth.  
  

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