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 $4.5 million to investment and $360,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 23 units, but (3) the sales price on all units will have to be lowered to $90,000 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. Open spreadsheet 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. Should the firm make the investment?

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 $4.5 million to investment and $360,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 23 units, but (3) the sales price on all units will have to be lowered to $90,000 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. Open spreadsheet 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. Should the firm make the investment?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 7P

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