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 $500,000; and the firm's assets (all equity financed) are $6 million. The firm estimates that it can change its production process, adding $3.5 million to investment and $320,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $8,000 and (2) increase output by 19 units, but (3) the sales price on all units will have to be lowered to $87,000 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. 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. X 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? 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? I. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one. II. The new situation would obviously have more business risk than the old one. III. The new situation would obviously have less business risk than the old one.
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 $500,000; and the firm's assets (all equity financed) are $6 million. The firm estimates that it can change its production process, adding $3.5 million to investment and $320,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $8,000 and (2) increase output by 19 units, but (3) the sales price on all units will have to be lowered to $87,000 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. 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. X 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? 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? I. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one. II. The new situation would obviously have more business risk than the old one. III. The new situation would obviously have less business risk than the old one.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 $500,000; and the firm's assets (all equity financed) are $6 million. The firm estimates that it can change its production process,
adding $3.5 million to investment and $320,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $8,000 and (2) increase output by
19 units, but (3) the sales price on all units will have to be lowered to $87,000 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.
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?
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?
I. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one.
II. The new situation would obviously have more business risk than the old one.
III. The new situation would obviously have less business risk than the old one.
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