Question 28 Break-even Point Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are S1.5 million, 50 earth stations are produced and sold each year, profits total $400,000, and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding S3 million to assets and $410,000 to fixed operating costs This change will reduce variable costs per unit by S12,000 and increase output by 22 units However, the sales price on all units must be lowered to $89,000 to p output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 15% and it uses no debt. ermit sales of the additional a. What is the incremental profit? To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Round answer to two decimal places Should the firm make the investment? Would the firm's break-even point increase or decrease if it made the change? Would the new situation expose the firm to more or less business risk than the old one? Why? I. The new situation would obviously have more business risk than the old one II. The new situation would obviously have less business risk than the old one IIL. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one. Question 28 Break-even Point Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are S1.5 million, 50 earth stations are produced and sold each year, profits total $400,000, and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding S3 million to assets and $410,000 to fixed operating costs This change will reduce variable costs per unit by S12,000 and increase output by 22 units However, the sales price on all units must be lowered to $89,000 to p output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 15% and it uses no debt. ermit sales of the additional a. What is the incremental profit? To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Round answer to two decimal places Should the firm make the investment? Would the firm's break-even point increase or decrease if it made the change? Would the new situation expose the firm to more or less business risk than the old one? Why? I. The new situation would obviously have more business risk than the old one II. The new situation would obviously have less business risk than the old one IIL. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one
