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 division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $551,000 (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 $75,000. Show how Ken will apply marginal analysis techniques to determine the following:
a. How much is the marginal benefits of the proposed new robotics?
b. How much is the marginal cost of the proposed new robotics?
c. How much is the net benefit of the proposed new robotics?
d. Should Bally Gears replace the old robotics with the new one?
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The solution provides step by step method for the calculation of marginal cost, marginal benefit and net benefit of the proposed new robotics at Bally Gears, Inc. Formula for the calculation and Interpretations of the results are also included.