Reference no: EM131327420

Lotus Pharmaceuticals Corp. is considering the replacement of equipment used in the production of one of its drugs used to treat arthritis. Last year, Lotus produced and sold 2.66 million capsules of this drug at a price of $8.50 per capsule. Operating expenses (excluding depreciation) are 22% of dollar sales. While Lotus expects increased demand for the drug over the next five years, the 2.66 million capsules sold last year is the maximum output capacity with the existing equipment. The new equipment would increase capacity and allow Lotus to meet the expected 4% annual growth in sales of the drug for the next five years. If the old equipment is not replaced, it would continue to produce 2.66 million capsules per year for the next five years.

The new equipment would also reduce operating expenses to 20% of dollar sales for all capsules produced. The sales price for the drug is expected to increase at the expected inflation rate of 3% per year. Compute the incremental revenue, operating expenses, and gross profit before depreciation (incremental revenue minus incremental operating expense) for the project for the next five years.