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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 $95,000 each. The firm's fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000; and the firm's assets (all equity financed) are $6 million. The firm estimates that it can change its production process, adding $3 million to investment and $320,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $8,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $84,000 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 12%, 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. Break-Even Point
Original price per unit $95,000
Fixed costs $2,000,000
Number of units produced and sold annually 50
Total annual profits $500,000
Firm's total assets $6,000,000
% of assets equity financed 100%
Change in production process:
Additional investment $3,000,000
Additional fixed costs $320,000
Reduction in variable cost per unit $8,000
Increase in units of output 20
Price to sell all units $84,000
Tax rate 0%
Cost of equity 12.00%
% of debt used 0%
Calculate incremental profit: Formulas
Step 1: Determine current variable cost per unit, V #N/A
Step 2: Determine new profit level if production process changed #N/A
Step 3: Calculate incremental profit #N/A
Approximate rate of return on new investment #N/A
Should the firm make the investment? #N/A
Calculate break-even point:
Original break-even point, QBE Old #N/A
New break-even point, QBE New #N/A
What happens to the break-even point? #N/A
Determination of more/less exposure to business risk:
Does the break-even point increase? #N/A
Percentage of Fixed Costs to Total Costs:
Original production process #N/A
New production process #N/A
Does the percentage of fixed costs increase? #N/A
Do your responses suggest that the new production process is more risky? #N/A 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)? Do not round intermediate calculations. Round your answer to two decimal places.
%

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