Would the firm break-even point increase or decrease

Assignment Help Financial Management
Reference no: EM132049620

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 $4 million to investment and $310,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $12,000 and (2) increase output by 22 units, but (3) the sales price on all units will have to be lowered to $83,000 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.

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)? 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. The new situation would obviously have less business risk than the old one.

II. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one.

III. The new situation would obviously have more business risk than the old one.

Reference no: EM132049620

Questions Cloud

Using cash flow diagramming in your analysis : Calculate the Present Worth, using Cash Flow Diagramming in your analysis.
Write a summary of the whole issue community college tuition : Write a summary of the whole issue Community College Tuition. This summary will answer the question: What is the issue about--from both perspectives?
Month set up costs to potential investors : You are completing a business plan for your new business, and need to demonstrate this month's set up costs to your potential investors.
Prepare the journal entry to record the payment of interest : Prepare the journal entry to record the payment of interest and the amortization of the premium on July 1, 2015, assuming no accrual of interest on June 30
Would the firm break-even point increase or decrease : Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. Would the firm's break-even point increase or decrease if it made change.
Difference between business risk and financial risk : What’s the difference between business risk and financial risk? Define “total risk” as it is used in capital structure theory. How is total risk measured?
What are the z-score and standard deviation : In a certain presidential election, 38% of voting-age Americans actually voted. In our town of 200,000, 40% of voting-age citizens voted.
Discuss the various causes of the stock market crash : Discuss the various causes of the stock market crash, paying particular attention to government policies that helped bring on the crash.
Put-call parity and total cost of the straddle : The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month,

Reviews

Write a Review

 

Financial Management Questions & Answers

  What is the change in the countrys imports

According to the spending multiplier (for a small open economy), by how much will domestic product and income change? - What is the change in the country's imports?

  Extent of negative consequences to the larger body

Systematic risk evaluates the probability and extent of negative consequences to the larger body.

  Present value calculations

Dr. Ima N. Pain has a patient that had $3,000 in services done. The customer cannot pay until a year from now. Dr. Ima earns a 5% return on her money. How much should she charge the patient if the patient will pay the bill in one year?

  Present consultant who suggested whole life police

Do you agree with the present consultant who suggested a whole life police for $250,000 for Ainsley?

  Calculate each project equivalent annual cost

Calculate each project's equivalent annual cost (EAC) given a discount rate of 10 percent.

  How much is the present value of the perpetual fee to bank

How much is the present value of the perpetual fee to the bank?

  Average real return and average nominal risk premium

You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 12 percent, –12 percent, 19 percent, 24 percent, and 10 percent. What was the average real return on Crash-n-Burn’s stock? What was the average nominal r..

  What is the present value of your? windfall

What is the present value of your? windfall? What is the future value of your windfall in three years? (on the date of the last? payment)?

  What will his annual payment be

Cal Lury owes $29,000 now. A lender will carry the debt for eight more years at 9 percent interest. What will his annual payment be?

  What is loss or gain to swiss investor who holds this bond

What is the loss or gain to a Swiss investor who holds this bond for a year? What is the loss or gain to a U.S. investor who holds this bond for a year?

  A project will require an initial investment

A project will require an initial investment of 76 million dollars in year 0, and is expected to generate equal yearly cash flows of 37 million dollars for the following 5 years. The company's WACC is 10%. What is the regular payback period?

  What is the maximum monthly mortgage payment allowed

What is the amount of the monthly payment, including the amount put in escrow? What is the maximum monthly mortgage payment allowed?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd