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Schweser Satellites Inc. produces satellite earth stations

Resolved Question:

Schweser Satellites Inc. produces satellite earth stations that sell for $100,000
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 $5 million. The firm estimates that it can change its production
process, adding $4 million to investment and $500,000 to fixed operating costs.
This change will (1) reduce variable costs per unit by $10,000 and (2) increase
output by 20 units, but (3) the sales price on all units will have to be lowered
to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards
that cause its tax rate to be zero, its cost of equity is 16%, and it uses
no debt.
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)? Should the firm make the
investment?
b. Would the firm’s break-even point increase or decrease if it made the change?
c. Would the new situation expose the firm to more or less business risk than the
old one?
Submitted: 6 years ago.
Category: Homework
Expert:  Neo replied 6 years ago.
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