10 Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI) a large, publicly traded firm that is the market share leader in radar detection systems RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five year project. The company bought some land three years ago for $3.4 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.5 million on an aftertax basis. In five years, the aftertax value of the land will be $6.9 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment wil cost $331 milion to build. The following market data on DEr's 10 points eBook Print References securities are current: Debt 270,000 bonds with a coupon rate of 6.5 percent outstanding, 23 years to maturity, selling for 105 percent of par; the bonds have a $1,000 par value each and make semiannual payments Common 10,000,000 shares outstanding, selling for $7460 per share; the beta is stock 1.25 Preferred 490,000 shares of 4.3 percent preferred stock outstanding, selling for stock $84.25 per share. The par value is $100 Market 6.5 percent expected market risk premium; 3.4 percent risk-free rate. DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 6.5 percent on new common stock issues, 4 percent on new preferred stock issues, and 2 10 percent on new common stock issues, 4 percent on new preferred stock issues, and 2 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEl that it raise the funds needed to build the plant by issuing new shares of common stock. DEl's tax rate is 22 percent. The project requires $1,600,000 in initial net working capital investment to get operational. Assume DEl raises all equity for new projects externally 10 points and that the NWC does not require floatation costs.. a. Calculate the project's initial Time 0 cash flow, taking into account all side effects. (A eBook Print References negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567) b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +1.5 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEl's project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) c. The manufacturing plant has an eight-year tax life, and DEl uses straight-line depreciation to a zero salvage value. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $5.7 million. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g.. 1,234,567) d. The company will incur $8,000,000 in annual fixed costs. The plan is to manufacture 9,675 RDSs per year and sell them at $11,120 per machine; the variable productiorn costs are $9,825 per RDS. What is the annual operating cash flow (OCF) from this costs are sy,825 per Kus. wnat ls ne annua' operating casn now (uur) rom unis project? (Do not round intermediate calculations and enter your answer in dollars not millions of dollars, rounded to the nearest whole dollar amount,e.g 1,234,567) e. DEl's comptroller is primarily interested in the impact of DEl's investments on the 10 points bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and round your answer to nearest whole number, e.g., 32.) f. Finally, DEI's president wants you to throw all your calculations, assumptions, and eBook Print References everything else into the report for the chief financial officer, all he wants to know is what the RDS project's internal rate of return (IRR) and net present value (NPV) are. (Do not round intermediate calculations. Enter your NPV in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. Enter your IRR as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cash flow b. Discount rate c. Aftertax salvage value d. Operating cash flow e. Break-even quantity f IRR NPV