Coleman Technologies is considering a major expansion program that has been proposed by the companys strategic technology group. Before proceeding with the expansion, the company needs to develop an estimate of its cost of capital. Assume that you are an assistant to Jerry Lehman, the financial vice-president. Your first task is to estimate Colemans cost of capital. Coleman is a large publicly traded firm that is the market share leader in light detection and ranging systems (LiDARs). The company is looking at setting up a manufacturing plant overseas to produce a new line of LiDARs. This will be a five-year project. The company bought some land three years ago for $2.7 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 $3.8 million. In five years, the aftertax value of the land will be $4.1 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 will cost $34 million to build. The following market data on Coleman's securities are current:

- Debt: 195,000 6.2 percent coupon bonds outstanding, 25 years to maturity, selling for 106 percent of par; the bonds have a $1,000 par value each and make semiannual payments. - Common stock: 8,100,000 shares outstanding, selling for $63 per share; the beta is 1.1. - Preferred stock: 450,000 shares of 4.25 percent preferred stock outstanding, selling for $83 per share. - Market: 7 percent expected market risk premium; 3.1 percent risk-free rate.

Coleman uses G. M. Wharton as its lead underwriter. Wharton charges Coleman 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 Coleman that it raise the funds needed to build the plant by issuing new shares of common stock. Coleman's tax rate is 25 percent. The project requires $1,500,000 in initial net working capital investment to get operational.

a). Calculate the project's initial Time 0 cash flow, taking into account all side effects.

b). The new LiDAR project is somewhat riskier than a typical project for Coleman, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating Coleman's project.

c). The manufacturing plant has an eight-year tax life, and Coleman uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $4.9 million. What is the aftertax salvage value of this manufacturing plant?

d). The company will incur $6,900,000 in annual fixed costs. The plan is to manufacture 12,100 LiDARs per year and sell them at $11,450 per machine; the variable production costs are $9,500 per LiDAR. What is the annual operating cash flow, OCF, from this project?

e). Coleman's comptroller is primarily interested in the impact of Coleman's investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of LiDARs sold for this project?

f). Finally, Coleman'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 LiDAR project's internal rate of return, IRR, and net present value, NPV, are. What will you report?