Marginal costbenefit 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 $560,000 (in todays dollars) over the next

5 years. The existing robotics would produce benefits of $400,000 (also in todays

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 costbenefit

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?