Written Assignment 1 - Corporate Finance Course...

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Corporate Finance Course 2017SP1-BME-213514-02 Professor: Dr. Sarah Hertz Module 1: Written Assignment by Hans J. Eiholzer Marginal cost-benefit 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 division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $526,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $400. 000 (also in today's 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 cost-benefit analysis techniques to 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 recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made? a. Total benefits $560,000 Existing benefits -$400,000 Marginal benefits $160,000 b. Initial cash investment $220,000 Existing equipment sale-$ 70,000 Marginal cost $150,000 c. Marginal benefits $160,000 Marginal cost -$150,000 Net profit $ 10,000 d. Ken should recommend to replace the existing robotics, because the net profit is positive. The benefits would make the shareholders financially better off. e. There are several factors that need to be considered prior to making a final decision. One needs to consider the incorporation of three important factors that would influence the cost of running the new robotics. The three most important points would be the timing, risk, and the cash flow. This would include cost factors such as electricity or other energy sources, and one needs to consider the cost of any training that the new equipment might require. Another factor is whether or not new and better robotics might be in development and be available within a short period of time. Ethics problem: What does it mean to say that managers should maximize shareholders wealth “subject to ethical constraints”? What ethical considerations might enter into decisions that result in cash flow and stock price effects that are less than they might otherwise have been?
Companies have to maximize the owner’s wealth subject to constraints that could be ethical or unethical. For a business manager it is crucial to emphasize on strategies that will induce increased prosperity for its shareholders. But any such decision must be followed in a way that follows ethical, legal, and regulatory limitations. Environmental sustainability and corporate responsibility is strongly emphasized in today’s business world. In the pursuit of higher profits, an ethically sound manager would not forgo the wellbeing of fellow human beings or the environment. The limitations thereof safeguard innocent parties from possible abuse of corporate power.

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