XYZ Company produces a product

XYZ Company produces a product that sells for $100,000 each. The company’s fixed costs are $2 million; 50 products are produced and sold each year; profits total $500,000; and the company’s assets (all equity financed) are $5 million. The company estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. The change will reduce variable costs per unit by $10,000 and increase output by 20 units. However, the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. Assume that the company has no debt, its cost of equity is 15 percent and there is no corporate tax, should the company make the change?

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