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 $3 million in anticipation of using it as a foxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $61 million on an aftertax basis. In five years, the aftertax value of the land will be $6.5 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 $327 million to build. The following market data on Der's securities are current Debt 250,000 bonds with a coupon rate of 6.1 percent outstanding, 24 years to maturity, selling for 105 percent of par, the bonds have a $1.000 par value each and make semiannual payments 9,600,000 shares outstanding, selling for $73.40 per share the beta is 125 Common stock Preferred 470,000 shares of 3.9 percent preferred stock outstanding, selling for stock $83.25 per share. The par value is $100 Marker 6.1 percent expected market risk premium 3 percent risk-free rate DEI uses GM Wharton as its lead underwriter. Wharton charges DEI spreads of 75 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. DEI'S fax rate is 23 percent. The project requires $1.500,000 in initial net working capital investment to get operational Assume DEl raises all equity for new projects externally and that the NWC does not require floatation costs a. Calculate the project's initial Time O cash flow, taking into account all side effects. (A negative answer should be indicated by a minus sign. Do not round Intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount.g. 1234,567.) b. The new RDS project is somewhat sider than a typical project for DEL primarily because the plant is being located overseas. Management has told you to use an adjustment factor of 20 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating Der's project (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places,... 32.16.) c. The manufacturing plant has an eight year tax life, and DEI uses straight line depreciation to a zero salvage value. At the end of the project that is the end of Year 5), the plant and equipment can be scrapped for $5.3 milion What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount.g. 1.234,567) d. The company will incur $7600.000 in annual feed costs. The plan is to manufacture 19,575 RDSs per year and sell them at S11080 per machine, the variable production costs are $9725 per RDS What is the annual operating cash flow (OCFfrom this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount. 1.234 567) . Ders comptroller is pemarly interested in the impact of Ders vestments on the bottom line of reported accounting statements What will you tell her is the accounting break even quantity of RDS sold for this project (Do not found intermediate calculations and round your answer to nearest whole number 9.32) Finally, Dens president want you to theow all your calculations assumptions and everything else into the report for the chief cancia oficer, he wants to knows what the RDS project's demarate o return RRand net present value (NPV) are Do not found intermediate calculations. Enter your NPV in dollars, not allons of
