Answered step by step
Verified Expert Solution
Question
...
1 Approved Answer
Problem 1 2 - 2 8 Project Evaluation [ LO 3 ] Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated
Problem Project Evaluation LO Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated 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 fiveyear project. The company bought some land three years ago for $ 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 $ million after taxes. In five years, the land will be worth $ million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $ million to build. The following market data on DEl's securities are current: DEl's tax rate is percent. The project requires $ in initial net working capital investment to get operational. a Calculate the project's Time cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. Note: 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, eg 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 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEl's project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to decimal places, eg c The manufacturing plant has an eightyear tax life, and DEI uses straightline depreciation. At the end of the project ie the end of Year the plant can be scrapped for $ million. What is the aftertax salvage value of this manufacturing plant? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, eg d The company will incur $ in annual fixed costs. The plan is to manufacture RDSs per year and sell them at $ per machine; the variable production costs are $ per RDS What is the annual operating cash flow, OCF, from this project? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, eg e Calculate the project's net present value. Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to decimal places, eg f Calculate the project's internal rate of return. Note: Do not round intermediate calculations and enter your answer as a percent rounded to decimal places, eg Answer is complete but not entirely correct.Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated 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 fiveyear project. The company bought some land three years ago for $ 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 $ million after taxes. In five years, the land will be worth $ million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $ million to build. The following market data on DEIs securities are current: Debt: percent coupon bonds outstanding, years to maturity, selling for percent of par; the bonds have a $ par value each and make semiannual payments. Common stock: shares outstanding, selling for $ per share; the beta is Preferred stock: shares of percent preferred stock outstanding, selling for $ per share. Market: percent expected market risk premium; percent riskfree rate. DEIs tax rate is percent. The project requires $ in initial net working capital investment to get operational.
Problem Project Evaluation LO
Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated 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 fiveyear project. The company bought some land three years ago for $ 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 $
million after taxes. In five years, the land will be worth $ million after taxes. The company
wants to build its new manufacturing plant on this land; the plant will cost $ million to build.
The following market data on DEl's securities are current:
DEl's tax rate is percent. The project requires $ in initial net working capital
investment to get operational.
a Calculate the project's Time cash flow, taking into account all side effects. Assume that any
NWC raised does not require floatation costs.
Note: 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, eg
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
percent to account for this increased riskiness. Calculate the appropriate discount rate to use
when evaluating DEl's project.
Note: Do not round intermediate calculations and enter your answer as a percent rounded
to decimal places, eg
c The manufacturing plant has an eightyear tax life, and DEI uses straightline depreciation. At
the end of the project ie the end of Year the plant can be scrapped for $ million. What
is the aftertax salvage value of this manufacturing plant?
Note: Do not round intermediate calculations and enter your answer in dollars, not millions
of dollars, eg
d The company will incur $ in annual fixed costs. The plan is to manufacture
RDSs per year and sell them at $ per machine; the variable production costs are $
per RDS What is the annual operating cash flow, OCF, from this project?
Note: Do not round intermediate calculations and enter your answer in dollars, not millions
of dollars, eg
e Calculate the project's net present value.
Note: Do not round intermediate calculations and enter your answer in dollars, not millions
of dollars, rounded to decimal places, eg
f Calculate the project's internal rate of return.
Note: Do not round intermediate calculations and enter your answer as a percent rounded
to decimal places, eg
Answer is complete but not entirely correct.Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated 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 fiveyear project. The company bought some land three years ago for $ 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 $ million after taxes. In five years, the land will be worth $ million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $ million to build. The following market data on DEIs securities are current:
Debt: percent coupon bonds outstanding, years to maturity, selling for percent of par; the bonds have a $ par value each and make semiannual payments.
Common stock: shares outstanding, selling for $ per share; the beta is
Preferred stock: shares of percent preferred stock outstanding, selling for $ per share.
Market: percent expected market risk premium; percent riskfree rate.
DEIs tax rate is percent. The project requires $ in initial net working capital investment to get operational.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started