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Schweser Satellites Inc. produces satellite earth stations that sell for $ 9 5 , 0 0 0 each. The firm's fixed costs, F , are
Schweser Satellites Inc. produces satellite earth stations that sell for $ each. The firm's fixed costs, F are $ million, earth stations are produced and sold each year, profits total $; and the firm's assets all equity financed are $ million. The firm estimates that it can change its production process, adding $ million to investment and $ to fixed operating costs. This change will reduce variable costs per unit by $ and increase output by units, but the sales price on all units will have to be lowered to $ 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 and it uses no debt.
The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. BreakEven Point
Original price per unit $
Fixed costs $
Number of units produced and sold annually
Total annual profits $
Firm's total assets $
of assets equity financed
Change in production process:
Additional investment $
Additional fixed costs $
Reduction in variable cost per unit $
Increase in units of output
Price to sell all units $
Tax rate
Cost of equity
of debt used
Calculate incremental profit: Formulas
Step : Determine current variable cost per unit, V #NA
Step : Determine new profit level if production process changed #NA
Step : Calculate incremental profit #NA
Approximate rate of return on new investment #NA
Should the firm make the investment? #NA
Calculate breakeven point:
Original breakeven point, QBE Old #NA
New breakeven point, QBE New #NA
What happens to the breakeven point? #NA
Determination of moreless exposure to business risk:
Does the breakeven point increase? #NA
Percentage of Fixed Costs to Total Costs:
Original production process #NA
New production process #NA
Does the percentage of fixed costs increase? #NA
Do your responses suggest that the new production process is more risky? #NA AWhat 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 Do not round intermediate calculations. Round your answer to two decimal places.
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