Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $2.5 million, 50 earth stations are produced

Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $2.5 million, 50 earth stations are produced and sold each year, profits total $600,000, and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $4 million to assets and $520,000 to fixed operating costs. This change will reduce variable costs per unit by $10,000 and increase output by 16 units. However, the sales price on all units must be lowered to $90,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 14%, and it uses no debt.

a.) What is the incremental profit? Round your answer to the nearest dollar.

b.) 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 your answer to two decimal places.

c.) Should the firm make the investment?

d.) Would the firm's break-even point increase or decrease if it made the change?

e.) Would the new situation expose the firm to more or less business risk than the old one?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Investments Valuation and Management

Authors: Bradford Jordan, Thomas Miller

7th edition

978-0078096785, 78096782, 978-0077861636, 77861639, 978-0078115660

More Books

Students also viewed these Finance questions