Wendy Winter needs to determine whether the current warehouse system should be upgraded to a new system. The new system would require an initial cash outlay of $250,000. The current system could be sold for $55,000. The monetary benefit of the new system over the next five years is $325,000, while the monetary benefit of the current system over the same period is $125,000. Furthermore, it is expected that the firm’s stock price will increase if the new system is implemented because it will make the firm more cost efficient and cost effective in the long run.

a. Identify and describe the analysis Wendy should use to make the decision.

b. Calculate the marginal benefit of the proposed new warehouse system.

c. Calculate the marginal cost of the proposed new warehouse system.

d. What should Wendy’s recommendation be to the firm regarding the new warehouse system? Explain your answer.

e. If the new system is implemented, will the firm achieve the primary financial goal of managers?