Question
Marginal Cost-Benefit Analysis and the Firm's Goal Ken Allen, a capital budgeting analyst for Bally Gears, Inc., was asked to evaluate a proposal. The manager
Marginal Cost-Benefit Analysis and the Firm's Goal Ken Allen, a capital budgeting analyst for Bally Gears, Inc., was asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used in the line of heavy-duty truck transmission systems would generate total benefits of $560,000 (in today's dollars) over the next 5 years. Existing robotics would produce profits of $400,000 (also in today's dollars) over the same period. An initial cash investment of $220,000 would be required to install the new equipment. Existing robotics can be sold for $70,000. Demonstrate how Ken will apply the techniques of marginal cost and benefit analysis to determine manager estimates that the following: a. The marginal (additional) benefits of the proposed new robotics. b. The marginal (additional) cost of the proposed new robotics. c. The net benefit of the proposed new roborica. d. What should the company do according to Ken Allen's recommendation? Why? C. What additional cost and benefit factors should be considered before making the final decision?
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