24 Jul WHAT IS THE INCREMENTAL PROFIT?
s f Show more Schweser Satellites Inc. produces satellite earth stations that sell for $100000 each. The firms fixed costs F are $2 million 50 earth stations are produced and sold each year profits total $500000 and the firms assets (all equity financed) are $5 million. The firm estimates that it can change its production process adding $4 million to investment and $500000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10000 and (2) increase output by 20 units but (3) the sales price on all units will have to be lowered to $95000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate 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 projects profitability what is the projects 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 firms 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? Show less
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