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 $600,000; and the firm's assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $3 million to investment and $380,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $8,000 and (2) increase output by 21 units, but (3) the sales price on all units will have to be lowered to $86,000 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.

1. What is the incremental profit?
2. 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.
3. Should the firm make the investment? YES or NO
4. Would the firm's break-even point increase or decrease if it made the change?
5. Would the new situation expose the firm to more or less business risk than the old one?
   1. The new situation would obviously have less business risk than the old one.
   2. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one.
   3. The new situation would obviously have more business risk than the old one.
6. 

Increase in units of output Price to sell all units Tax rate Cost of equity % of debt used 21 $86,000 0% 16.00% 0% Calculate incremental profit: Step 1: Determine current variable cost per unit, V Step 2: Determine new profit level if production process changed Step 3: Calculate incremental profit Approximate rate of return on new investment Should the firm make the investment? Calculate break-even point: Original break-even point, QBEOld What happens to the break-even point? Determination of more/less exposure to business risk: Does the break-even point increase? Percentage of Fixed Costs to Total Costs: Original production process New production process Does the percentage of fixed costs increase? Do your responses suggest that the new production process is more risky