2. Part I: The eccentric billionaire Zaggy Zargawhoop considers building a new factory that will expand his business empire. If he builds the factory, he will obtain additional future revenue worth $110 million today. Building the factory costs $85 million in construction costs. If he does not build the factory, he gets nothing. i) If he builds the factory, what happens to Zaggy? ii) If he does not build the factory, what happens to Zaggy? iii) Based on your answers for (i) and (ii), what should Zaggy do? Explain. i) What is the marginal benefit of building the factory? ii) What is the marginal cost of building the factory? iii) According to the optimal decision rule, should Zaggy build the factory? c. Do your answers to part (a) and part (b) agree? Explain. а. b.
2. Part I: The eccentric billionaire Zaggy Zargawhoop considers building a new factory that will expand his business empire. If he builds the factory, he will obtain additional future revenue worth $110 million today. Building the factory costs $85 million in construction costs. If he does not build the factory, he gets nothing. i) If he builds the factory, what happens to Zaggy? ii) If he does not build the factory, what happens to Zaggy? iii) Based on your answers for (i) and (ii), what should Zaggy do? Explain. i) What is the marginal benefit of building the factory? ii) What is the marginal cost of building the factory? iii) According to the optimal decision rule, should Zaggy build the factory? c. Do your answers to part (a) and part (b) agree? Explain. а. b.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:2. Part I: The eccentric billionaire Zaggy Zargawhoop considers building a new factory that will
expand his business empire. If he builds the factory, he will obtain additional future revenue
worth $110 million today. Building the factory costs $85 million in construction costs. If he
does not build the factory, he gets nothing.
i) If he builds the factory, what happens to Zaggy?
ii) If he does not build the factory, what happens to Zaggy?
iii) Based on your answers for (i) and (ii), what should Zaggy do? Explain.
i) What is the marginal benefit of building the factory?
ii) What is the marginal cost of building the factory?
iii) According to the optimal decision rule, should Zaggy build the factory?
а.
b.
c. Do your answers to part (a) and part (b) agree? Explain.
Expert Solution
Step 1
Marginal benefit can be defined as the additional benefit that a customer receives from purchasing an additional units.
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