Problem
Schweser Satellites Inc. produces satellite earth stations that sell for $105,000 each. The firm's fixed costs, F, are $1 million, 50 earth stations are produced and sold each year, profits total $600,000, and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $3 million to assets and $300,000 to fixed operating costs. This change will reduce variable costs per unit by $12,000 and increase output by 25 units. However, the sales price on all units must be lowered to $100,000 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 18%, and it uses no debt. What is the incremental profit?