Question
8. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share
8.
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 $7 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. If the land were sold today, the net proceeds would be $7.61 million after taxes. In five years, the land will be worth $7.91 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.04 million to build. The following market data on DEIs securities are current: |
Debt: | 45,100 6.9 percent coupon bonds outstanding, 21 years to maturity, selling for 94.9 percent of par; the bonds have a $1,000 par value each and make semiannual payments. |
Common stock: | 751,000 shares outstanding, selling for $94.10 per share; the beta is 1.21. |
Preferred stock: | 35,100 shares of 6.25 percent preferred stock outstanding, selling for $92.10 per share. |
Market: | 7.05 percent expected market risk premium; 5.25 percent risk-free rate. |
DEIs tax rate is 34 percent. The project requires $830,000 in initial net working capital investment to get operational. |
Requirement 1: |
Calculate the projects Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs.(Do not round intermediate calculations. Negative amount should be indicated by a minus sign.Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) |
Initial Time 0 cash flow | $ |
Requirement 2: |
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 +3 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEIs project.(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) |
Discount rate | % |
Requirement 3: |
The manufacturing plant has an eight-year tax life, and DEI uses straightline depreciation. At the end of the project (i.e., the end of year 5), the plant can be scrapped for $1.51 million. What is the aftertax salvage value of this manufacturing plant?(Do not round intermediate calculations.Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) |
Aftertax salvage value | $ |
Requirement 4: |
The company will incur $2,310,000 in annual fixed costs. The plan is to manufacture 13,100 RDSs per year and sell them at $10,500 per machine; the variable production costs are $9,700 per RDS. What is the annual operating cash flow, OCF, from this project?(Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) |
Operating cash flow | $ |
Requirement 5: | |
(a) | Calculate the net present value.(Do not round intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).) |
Net present value | $ |
(b) | Calculate the internal rate of return.(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) |
Internal rate of return | % |
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