Assume that Monsanto Corporation is considering the renovation and/or replacement of some of its older and outdated carpet-manufacturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company’s finance department has compiled pertinent data that will allow it to conduct a marginal cost–benefit analysis for the proposed equipment replacement. The cash outlay for new equipment would be approximately $600,000.
The net book value of the old equipment and its potential net selling price add up to $250,000.
The total benefits from the new equipment (measured in today’s dollars) would be $900,000.
The benefits of the old equipment over a similar period of time (measured in today’s dollars) would be $300,000.
To do
Create a spreadsheet to conduct a marginal cost–benefit analysis for Monsanto Corporation, and determine the following:
a. The marginal (added) benefits of the proposed new equipment.
b. The marginal (added) cost of the proposed new equipment.
c. The net benefit of the proposed new equipment.
d. What would you recommend that the firm do? Why?
Benefits with the new equipment
Less: Benefits with the old equipment
(1) Marginal (added) benefits of the New Equipment
Cost of new equipment
Less: Proceeds from the sale of the old equipment
(2) Marginal (added) costs of the New Equipment
Net benefit (1) - (2)