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Neo, Tutor
Category: Homework
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Experience:  BS Accounting
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A firm produces satellite earth stations that sell for $100,000

Customer Question

A firm 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 firms assets (all equity financed) are 5 million. The firm estimates it can change it 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 15%, and it uses no debt.a. Should the firm make the change? b. Would the firm's breakeven 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? PLEASE SHOW ME YOUR WORK..I HAVE BREAK EVEN AT 50 & 56
Submitted: 8 years ago.
Category: Homework
Expert:  Neo replied 8 years ago.

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Customer: replied 8 years ago.
How did the book get the following answers?

a. ROI = 21.25% > WACC - 15%
b (1) OL(old) = 44.44% OL(new) = 47.17%
(2) Q(BEold) = 40; Q(BENew) 45.45
Expert:  Neo replied 8 years ago.

Good day!


For number (2) Q(BEold) = 40; Q(BENew) = 45.45. That is what I have computer in the b, I just rounded off the 45.45 to 46.


Can you please tell me what OL means?

Customer: replied 8 years ago.
OL = Operational Leverage, I think...also what about the ROIC in the 20's how the heck did they get that?
Expert:  Neo replied 8 years ago.

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