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Achweser Satellites Inc. makes satellite earth stations which sell for $100,00 each. Firm's fixed costs, F are $2 million, 50 earth stations are produced and sold each year, profits total $ 500,000, and firm's assets ( all equity financed) are $5 million. Firm evaluates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. Change will:

(1) decrease variable cost per unit by $ 10,000 and
(2) rise output by 20 units, but
(3) sales price on all units will have to be lowered to $95,000 to allow sales of extra output. Firm has tax loss carryforwards which render its tax rate zero, its cost of equity is 16%, and it uses no debt.

(a) Determine the incremental profit? To get rough idea of project's profitability, determine the project's expected rate of return for next year (defined as incremental profit divided by investment)? Must firm make investment?
(b) would firm's break-even point increase or decrease if it made change?
(c) Would new condition expose firm to more or less business risk than old one?

Project Management, Management Studies

  • Category:- Project Management
  • Reference No.:- M932276

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