Question: Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $2.5 million, 50 earth stations are produced and sold each year, profits total $400,000; and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $4 million to investment and $380,000 to fixed operating costs. This change will
(1) reduce variable costs per unit by $7,000 and
(2) increase output by 20 units, but
(3) the sales price on all units will have to be lowered to $89,000 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 12%, and it uses no debt.