Question
Schweser Satellites Inc. produces satellite earth stations that sell for $250,000 each. The firm's fixed costs, F, are $3 million, 30 earth stations are produced
Schweser Satellites Inc. produces satellite earth stations that sell for $250,000 each. The firm's fixed costs, F, are $3 million, 30 earth stations are produced and sold each year, profits total $1,000,000, and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $2 million to investment and $800,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $15,000 and (2) increase output by 30 units, but (3) the sales price on all units will have to be lowered to $200,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 12%, and it uses no debt. What is the incremental profit?
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