Calculate the weighted average cost of capital with the given information.
Suppose you have been hired as a nancial consultant to Defense Electronics. Inc. (DEI). a large. publicly traded m'l 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 ve-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 $174 million after taxes. In ve years. the land will be worth $6.04 million after taxes. The company wants to build its new manufactunng plant on this land; the plant will cost $13.56 million to build. The following market data on DEI's securities are current: Debt: 46,400 7.2 percent mupon bonds wtstanding, 10 years to maturity, selling for 93.6 percent of per; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 764,000 shares outstanding, selling for $95.40 per share; the beta is 1.15. Preferred shck136,400 shares of 6.4 percent preferred slack outstanding, selling for $90.40 per share. Market: 7.2 percent expected market nsk premium; 5.4 percent risk-free rate. DEI's tax rate is 40 percent. The project requires $895,000 in initial net working capital investment to get oposrationl. a Calculate the projech Time 0 cash flow. taking into account all side effects. Assume that any NWC raised does not require oatation costs. (A negative answer should be Indlceted by a mlnus sign. Do not round Intermediate mlculatlons and enter your answer In dollars, not mllllons of dollars, e.g., 1,234,557.) Time 0 rash flow 55 b. The new RDS project is somewhat riskier than a typical project for DEI. plimarily because the plant is being located overseas. Management has told you to use an adjustment factorof +1 percent to account for this increased nskiness. Calculate the appropriate discount rate to use when evaluating DEI's project. (Do not round Intermedlate calculations and enter your answer as a percent rounded to 2 decimal places, a.g., 32.16.] Discount rate 36 c. The manufacturing plant has an eight-year tax lite, and DEI uses straight-line depreciation. At the end of the project (i.e.. the and onear 5), the plant (an be scrapped for $1.64 million. What is the attertax salvage value of this manufactunng plant'? [Do not round lntermedlate calculations and enter your answer In dollars. not mllllons of dollars, e.g.. 1,234.567.) Altertax salvage value $ d. The companyr will inwr$2.440.000 in annual xed costs. The plan is to manufacture 14.400 R055 per year and sell them at $11,800 per machine: the variable production costs are 511,000 per RDS. What is the annual operating cash flow. OCF. from this project? (Do not round Intermediate calculations and enter your answer In dollars, not millions of dollars, e.g., 1,234,567.) Operating cash ilow S Calculate the project's net present value. (Enter your answer In dollars. not millions of dollars. e.g.. 1.234.567. Do not round Intermediate calculations and round your answer to 2 decimal places. e.g.. 32.16.) Net present value 5 l Calculate the prq'ect's iniemal rate of reium. (Do not round lntennedlate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Internal rate of retum %
