Schweser Satellites Inc. produces satellite earth station that sell for $100,000 each. The firms fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firms assets (all equity financed) are $5 million, The firm estimates that it can change its production process, adding $4 million to assit and $500,000 to fixed operating costs. This change will reduce variable cots per unit by $10,000 and increase output by 20 units. However, the sales price on all units must be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carry forwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.

A. What is the incremental profit? To get a rough idea of the projects profitability, what is the projects expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not?