What is the incremental profit- project profitability

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Schweser Satellites Inc. produces satellite earth stations that sell for $99,100.00 each. The firm's fixed costs, F, are $1.60 million, 65 earth stations are produced and sold each year, profits total $394,000.00; and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $3.26 million to investment and $410,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,345.00 and (2) increase output by 24 units, but (3) the sales price on all units will have to be lowered to $87,710.00 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 15%, and it uses no debt. 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)?

Reference no: EM131062907

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