$24.$ Project Evaluation This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. 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 $5-$year project. The company bought some land three years ago for $$7\mathrm{.}3$ million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $$7\mathrm{.}5$ million. In five years, the aftertax value of the land will be $$7\mathrm{.}9$ million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equip$-$ ment will cost $$55$ million to build. The following market data on DEI's securities is current:Debt:$130,0006\mathrm{.}1$ percent coupon bonds outstanding, $25$ years to matu$-$ rity, selling for $104$ percent of par; the bonds have a par value of $$2,000$ and make semiannual payments $.9,900,000$ shares outstanding, selling for $$68$ per share; the beta is $1\mathrm{.}20.$ Common stock: Preferred stock:$400,000$ shares of $4\mathrm{.}20$ percent preferred stock outstanding, selling for $$87$ per share and having a par value of $$100.$ Market: $7$ percent expected market risk premium; $3\mathrm{.}1$ percent risk$-$free rate. uses G$.$M$.$ Wharton as its lead underwriter. Wharton charges DEI spreads of $6\mathrm{.}5$ percent on new common stock issues, $4\mathrm{.}5$ percent on new preferred stock issues, and $3$ 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 DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI's tax rate is $25$ percent. The project requires $$2\mathrm{.}5$ million in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally.a$.$ Calculate the project's initial Year $0$ cash flow, taking into account all side effects. b$.$ The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjust$-$ ment factor of $+2$ percent to account for this increased riskiness. Calculate the appro$-$ priate discount rate to use when evaluating DEI's project. $.$ The manufacturing plant has an $8-$year tax life and DEI uses straight$-$line deprecia$-$ tion. At the end of the project $($i$.$e$.,$ the end of Year $5),$ the plant and equipment can be scrapped for $$8\mathrm{.}9$ million. What is the aftertax salvage value of this plant and equipment $?$ d$.$ The company will incur $$8\mathrm{.}1$ million in annual fixed costs. The plan is to manufacture $18,500$ RDSS per year and sell them at $$11,600$ per machine; the variable production costs are $$9,750$ per RDS$.$ What is the annual operating cash flow $($OCF$)$ from this project? e$.$ DEI's comptroller is primarily interested in the impact of DEI's investments on the bottom line of reported accounting statements. What will you tell her is the accounting break$-$even quantity of RDSS sold for this project? f$.$ Finally, DEI's president wants you to throw all your calculations, assumptions, and 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. What will you report?