Been working this question and I have checked my answers. The answers are correct with the exception of a) cash flow, d) operating cash flow and f) IRR and NPV. I have attached my worksheet and would like you to review those 3 questions to see what I'm doing wrong. Here is the question:

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 $4.7 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. The land was appraised last week for $5.5 million. In five years, the aftertax value of the land will be $5.9 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 will cost $32.16 million to build. The following market data on DEIs securities is current:

Debt:	232,000 7 percent coupon bonds outstanding, 25 years to maturity, selling for 107 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
Common stock:	9,000,000 shares outstanding, selling for $71.20 per share; the beta is 1.3.
Preferred stock:	452,000 shares of 4 percent preferred stock outstanding, selling for $81.20 per share and and having a par value of $100.
Market:	6 percent expected market risk premium; 4 percent risk-free rate.

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 7 percent on new common stock issues, 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. DEIs tax rate is 40 percent. The project requires $1,350,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally.

a.

Calculate the projects initial Time 0 cash flow, taking into account all side effects. Assume that the net working capital will not require flotation costs.(Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

Cash flow

$

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 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 percent rounded to 2 decimal places (e.g., 32.16).)

Discount rate

%

c.

The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $4.7 million. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

Aftertax salvage value

$

d.

The company will incur $7,000,000 in annual fixed costs. The plan is to manufacture 18,000 RDSs per year and sell them at $10,900 per machine; the variable production costs are $9,500 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

$

e.

DEIs comptroller is primarily interested in the impact of DEIs investments on the bottom line of reported accounting statements. What will you tell her is theaccounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and round your final answer to the nearest whole number.)

Break-even quantity

units

f.

Finally, DEIs 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 projects internal rate of return (IRR) and net present value (NPV) are. Assume that the net working capital will not require flotation costs. (Enter your NPVanswer in dollars, not millions of dollars (e.g., 1,234,567).Enter your IRR answer as a percent. Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)

IRR	%
NPV	$

Chapter 11 Question 12 Input area: Beta Market E(R) Risk-free return 1.02 12.00% 3.00% Output area: Stock E(R) 12.18% Chapter 12 Question 17 Input Area: Bond 1: Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Bond price (% of par) 110,000 20 7.00% 2 109.50% Bond 2: Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Bond price (% of par) 280,000 30 0.00% 2 18.00% Common stock Shares outstanding Beta Share price 3,100,000 1.10 $57.00 Preferred stock outstanding Shares outstanding Coupon rate Share price Market Market risk premium Risk-free rate Tax rate 200,000 5.00% $71.00 Period yield PMT Period yield RRR Par Value DV Amount Yield 40 $35.00 0.035 60 13.80% 100 5 7.0% 8.00% 5.00% 25% Mark: Step 1: Calculate the market value of each component of the capital structure. Output Area: Market Value Mark: Step 2: Calculate the capital structure on a % basis. Capital Structure Bond 1 $ 120,450,000 33.30% Bond 2 Common stock Preferred stock Total firm $ $ $ $ 50,400,000 176,700,000 14,200,000 361,750,000 13.93% 48.85% 3.93% 100.00% Mark: Step 3: Use the provided information to calculate the cost of each component of the capital structure. Cost Bond 1 before tax Bond 1 after tax Bond 2 before tax Bond 2 after tax Common Preferred WACC 6.17% 4.63% 5.80% 4.35% 13.80% 7.04% 9.16% Mark: Step 4: Calculate the weighted average cost of capital! Chapter 12 Question 24 Input Area: Land price Current land value Land value in 5 years Plant & Equipment cost $ $ $ $ Debt Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Face value (% of par) Bond price (% of par) Common stock Shares outstanding Beta Share price 4,700,000 5,500,000 5,900,000 32,160,000 232,000 25 7.00% 2 1,000.00 107.00% $ 9,000,000 1.30 71.20 Preferred stock outstanding Shares outstanding Coupon rate Share price $ 452,000 4.00% 81.20 Market Market risk premium Risk-free rate Equity flotation cost Preferred flotation cost Debt flotation cost Tax rate Net working capital Does the NWC require flotation costs (Yes/No) b. Adjustment factor c. Life of plant (years) Life of project (years) Plant salvage value d. Annual fixed costs # RDS manufactured Sale price per RDS Variable costs per RDS 6.00% 4.00% $ 7.00% 5.00% 3.00% 40% 1,350,000 NO $ $ $ $ 1% 8 5 4,700,000 7,000,000 18,000 10,900 9,500 Output Area: Market value of debt Market value of equity Market value of preferred Market value of firm $ $ $ $ D/V E/V P/V 248,240,000 640,800,000 36,702,400 925,742,400 3.00% 7.00% 5.00% 5.53% a. flotation costs The cost of the land 3 years ago is a sunk cost and is irrelevant. Land $ 5,500,000 Plant & Equipment Cost 34,041,225 Net working capital 1,350,000 Total Time 0 $ 40,891,225 b. Pretax cost of debt Aftertax cost of debt Cost of equity Cost of preferred WACC 6.43% 3.86% 11.80% 4.93% 9.40% Discount rate for project c. Book value in year 5 Aftertax salvage value d. Sales Variable costs Fixed costs Depreciation EBIT Taxes Net income Depreciation Operating cash flow 10.40% Year 0 1 2 3 4 5 IRR NPV 26.82% 69.22% 3.96% 100.00% Mark: weighted average flotation costs. See section 12.11 in text book. Mark: See section 12.11. Gross up items, as appropriate, for flotation costs. Mark: = WACC + Adjustment for Risk Mark: $ $ $ $ $ e. Accounting breakeven f. Wd We Wp Total $ $ Gross salvage value 7,644,000 ((capital gain or loss) times (1-TR)) 196,200,000 171,000,000 7,000,000 4,020,000 14,180,000 5,672,000 8,508,000 4,020,000 Mark: 12,528,000 (fixed costs + depr) / (Sales price - variable cost) 7,871 Cash Flow (40,891,225) 12,528,000 12,528,000 12,528,000 12,528,000 27,422,000 22.50% (40,891,225.61) Mark: = OCF + NWC + NSV + after-tax value of land WD V $ 12,060,000 Loss $ (7,360,000) TS $ (2,944,000) Chapter 11 Question 12 Input area: Beta Market E(R) Risk-free return 1.02 12.00% 3.00% Output area: Stock E(R) 12.18% Chapter 12 Question 17 Input Area: Bond 1: Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Bond price (% of par) 110,000 20 7.00% 2 109.50% Bond 2: Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Bond price (% of par) 280,000 30 0.00% 2 18.00% Common stock Shares outstanding Beta Share price 3,100,000 1.10 $57.00 Preferred stock outstanding Shares outstanding Coupon rate Share price Market Market risk premium Risk-free rate Tax rate 200,000 5.00% $71.00 Period yield PMT Period yield RRR Par Value DV Amount Yield 40 $35.00 0.035 60 13.80% 100 5 7.0% 8.00% 5.00% 25% Mark: Step 1: Calculate the market value of each component of the capital structure. Output Area: Market Value Mark: Step 2: Calculate the capital structure on a % basis. Capital Structure Bond 1 $ 120,450,000 33.30% Bond 2 Common stock Preferred stock Total firm $ $ $ $ 50,400,000 176,700,000 14,200,000 361,750,000 13.93% 48.85% 3.93% 100.00% Mark: Step 3: Use the provided information to calculate the cost of each component of the capital structure. Cost Bond 1 before tax Bond 1 after tax Bond 2 before tax Bond 2 after tax Common Preferred WACC 6.17% 4.63% 5.80% 4.35% 13.80% 7.04% 9.16% Mark: Step 4: Calculate the weighted average cost of capital! Chapter 12 Question 24 Input Area: Land price Current land value Land value in 5 years Plant & Equipment cost $ $ $ $ Debt Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Face value (% of par) Bond price (% of par) Common stock Shares outstanding Beta Share price 4,700,000 5,500,000 5,900,000 32,160,000 232,000 25 7.00% 2 1,000.00 107.00% $ 9,000,000 1.30 71.20 Preferred stock outstanding Shares outstanding Coupon rate Share price $ 452,000 4.00% 81.20 Market Market risk premium Risk-free rate Equity flotation cost Preferred flotation cost Debt flotation cost Tax rate Net working capital Does the NWC require flotation costs (Yes/No) b. Adjustment factor c. Life of plant (years) Life of project (years) Plant salvage value d. Annual fixed costs # RDS manufactured Sale price per RDS Variable costs per RDS 6.00% 4.00% $ 7.00% 5.00% 3.00% 40% 1,350,000 NO $ $ $ $ 1% 8 5 4,700,000 7,000,000 18,000 10,900 9,500 Output Area: Market value of debt Market value of equity Market value of preferred Market value of firm $ $ $ $ 248,240,000 640,800,000 36,702,400 925,742,400 D/V E/V P/V 26.82% 69.22% 3.96% 100.00% a. flotation costs 5.85% The cost of the land 3 years ago is a sunk cost and is irrelevant. Land $ (5,500,000) Plant & Equipment Cost (34,157,568) Net working capital (1,350,000) Total Time 0 $ (41,007,568) b. Pretax cost of debt Aftertax cost of debt Cost of equity Cost of preferred WACC 6.43% 3.86% 11.80% 4.93% 9.40% Discount rate for project c. Book value in year 5 Aftertax salvage value d. Sales Variable costs Fixed costs Depreciation EBIT Taxes Net income Depreciation Operating cash flow 10.40% Year 0 1 2 3 4 5 IRR NPV 26.82% 69.22% 3.96% 100.00% Mark: weighted average flotation costs. See section 12.11 in text book. Mark: See section 12.11. Gross up items, as appropriate, for flotation costs. Mark: = WACC + Adjustment for Risk Mark: $ $ $ $ $ e. Accounting breakeven f. Wd We Wp Total $ $ Gross salvage value 7,644,000 ((capital gain or loss) times (1-TR)) 196,200,000 171,000,000 7,000,000 4,020,000 14,180,000 5,672,000 8,508,000 Mark: 4,020,000 (fixed costs + depr) / 12,528,000 (Sales price - variable cost) 7,871 Cash Flow (41,007,568) 12,528,000 12,528,000 12,528,000 12,528,000 27,422,000 22.38% 15,086,412.49 Mark: = OCF + NWC + NSV + after-tax value of land WD V Loss $ 12,060,000 $ (7,360,000) TS $ (2,944,000) Chapter 11 Question 12 Input area: Beta Market E(R) Risk-free return 1.02 12.00% 3.00% Output area: Stock E(R) 12.18% Chapter 12 Question 17 Input Area: Bond 1: Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Bond price (% of par) 110,000 20 7.00% 2 109.50% Bond 2: Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Bond price (% of par) 280,000 30 0.00% 2 18.00% Common stock Shares outstanding Beta Share price 3,100,000 1.10 $57.00 Preferred stock outstanding Shares outstanding Coupon rate Share price Market Market risk premium Risk-free rate Tax rate 200,000 5.00% $71.00 Period yield PMT Period yield RRR Par Value DV Amount Yield 40 $35.00 0.035 60 13.80% 100 5 7.0% 8.00% 5.00% 25% Mark: Step 1: Calculate the market value of each component of the capital structure. Output Area: Market Value Mark: Step 2: Calculate the capital structure on a % basis. Capital Structure Bond 1 $ 120,450,000 33.30% Bond 2 Common stock Preferred stock Total firm $ $ $ $ 50,400,000 176,700,000 14,200,000 361,750,000 13.93% 48.85% 3.93% 100.00% Mark: Step 3: Use the provided information to calculate the cost of each component of the capital structure. Cost Bond 1 before tax Bond 1 after tax Bond 2 before tax Bond 2 after tax Common Preferred WACC 6.17% 4.63% 5.80% 4.35% 13.80% 7.04% 9.16% Mark: Step 4: Calculate the weighted average cost of capital! Chapter 12 Question 24 Input Area: Land price Current land value Land value in 5 years Plant & Equipment cost $ $ $ $ Debt Bonds outstanding Years to Maturity Annual coupon rate Coupons per year Face value (% of par) Bond price (% of par) Common stock Shares outstanding Beta Share price 4,700,000 5,500,000 5,900,000 32,160,000 232,000 25 7.00% 2 1,000.00 107.00% $ 9,000,000 1.30 71.20 Preferred stock outstanding Shares outstanding Coupon rate Share price $ 452,000 4.00% 81.20 Market Market risk premium Risk-free rate Equity flotation cost Preferred flotation cost Debt flotation cost Tax rate Net working capital Does the NWC require flotation costs (Yes/No) b. Adjustment factor c. Life of plant (years) Life of project (years) Plant salvage value d. Annual fixed costs # RDS manufactured Sale price per RDS Variable costs per RDS 6.00% 4.00% $ 7.00% 5.00% 3.00% 40% 1,350,000 NO $ $ $ $ 1% 8 5 4,700,000 7,000,000 18,000 10,900 9,500 Output Area: Market value of debt Market value of equity Market value of preferred Market value of firm $ $ $ $ 248,240,000 640,800,000 36,702,400 925,742,400 D/V E/V P/V 26.82% 69.22% 3.96% 100.00% a. flotation costs 5.85% The cost of the land 3 years ago is a sunk cost and is irrelevant. Land $ (5,500,000) Plant & Equipment Cost (34,157,568) Net working capital (1,350,000) Total Time 0 $ (41,007,568) b. Pretax cost of debt Aftertax cost of debt Cost of equity Cost of preferred WACC 6.43% 3.86% 11.80% 4.93% 9.40% Discount rate for project c. Book value in year 5 Aftertax salvage value d. Sales Variable costs Fixed costs Depreciation EBIT Taxes Net income Depreciation Operating cash flow 10.40% Year 0 1 2 3 4 5 IRR NPV 26.82% 69.22% 3.96% 100.00% Mark: weighted average flotation costs. See section 12.11 in text book. Mark: See section 12.11. Gross up items, as appropriate, for flotation costs. Mark: = WACC + Adjustment for Risk Mark: $ $ $ $ $ e. Accounting breakeven f. Wd We Wp Total $ $ Gross salvage value 7,644,000 ((capital gain or loss) times (1-TR)) 196,200,000 171,000,000 7,000,000 4,020,000 14,180,000 5,672,000 8,508,000 Mark: 4,020,000 (fixed costs + depr) / 12,528,000 (Sales price - variable cost) 7,871 Cash Flow (41,007,568) 12,528,000 12,528,000 12,528,000 12,528,000 27,422,000 22.38% 15,086,412.49 Mark: = OCF + NWC + NSV + after-tax value of land WD V Loss $ 12,060,000 $ (7,360,000) TS $ (2,944,000)