Problem 13-24 Project Evaluation Suppose you hove been hired as s finsncid consultsnt to Deiense Electronics, detection systems [RDSa). The compsny ls looking st setting up s manufiscturing plant averses: to produce s new line of RDS: Thls wil be s five-yes project. The compony dump site for weate chemicsla, but it bult s plping syatem to ssiely discard the chemicals instesd. The land was sppresed last week for $5.9 millian on sn sitertax bosia. In five years, the aftertsx vslue of the land will be $6.3 million, but the compony expects to keep the land for s future project. The compony wonts to bulld lts new monufecturing plant on thls lsnd; the piant snd equipment will cost $3249 milion to buld. The following market dsta on DEl's securites ls current Debt: 118,0007.2 percent coupon bonds outatsnding, 27 yesrs to maturity, seling for 109 percent of por, the bonds hsve s psr vslue of $2,000 and mske semisnnusl poyments. Common 9,400,000 shseres outstsnding, seling for $7160 per share; the bets is stock 1.1 . Preferred 456,000 shsres of 4.9 percent preferred stock outstsncing, seling for stock $8160 per share; the stock hes a porvilue of $100. Morket 7 percent expected morket rish premlum; 3.7 percent risk-free rate. DEI uses G.M. Wharton os its lead underwriter. Whsrton charges DEl spreads of 6.5 percent on new common stock lasues, 5.5 percent on new preferred stock lasues, and 4.5 percent an new debt lasues. Wharton hss included sll clrect and indirect lasusence costs (slong with its profit) in setting these spresd. Whsrton has recommended to DEI thet it re'se the funds needed to buld the plsnt by lasulng new shsres of common stock. DEl's tsx rste is 21 percent. The project requires $1,450,000 in inltisi net working copital investment to get operstionsi. Assume Wharton reses sil equity for new projects externsily. a. Colculate the project's Initiel Year O cssh flow, tshing into occount al side effects. Assume thst the net working csptsi wil not requlre flotetion coats. (A negstive answer should be indicsted by a minus sign. Do not round intermediste calculations and enter your answer In dollars, not millions of dollars, rounded to the nearest whole number, eg., 1,234,567) b. The new RDG project is somewhst rikier then 5 typlasl project for DEI, primerly becsuse the plent ls being locsted oversess. Msnegement hea told you to use sn soljustment foctor of 2 percent to sccount for this Increased riakiness. Colculate the sppropriste discount rate to use when evalusting DEl's project. (Do not round Intermediate calculationa and enter your answer as a percent rounded to 2 decimal ploces, eg., 3216.) c. The monufocturing plont has on eightyesr tox life, and DEI uses straight-line depreciation. At the end of the project (that k, the end of Year 5), the plant and equipment csn be scropped for $5.1 million. What is the sitertox sslvsge volue of this plant snd equlpment? (Do not round Intermedlate calculations and enter your answer In dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) d. The compony will incur $7,400,000 in annusl fixed coata. The plan is to menufocture 20,000 RDSa per yesr and sel them ot $11,100 per mochine; the varisble production coats are $9700 per RDS. What is the annusl opersting cosh flow (OCF) from this project? (Do not round intermediate calculations sind enter your snswer In dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) e. DEl's comptraller is primarly interested in the impoct of DEl's investments an the bottom line of reported sccounting ststements. What will you tel her la the sccourting break-ven quantity of RDSa sold for thli project? (Do not round intermediste calculatians and round your answer to the nearest whale number, e.9-32) f. Fins y, DEl's president wants you to throw al your csiculations, sssumptions, and everything else into the report for the chief finsnclal officer, sll he wonts to know is whot the RDG project's internsl rote of return (RR) snd net present value (NPV) ore. (Do not round Intermedlate calculations. Enter your NPV answer in dollars, not millions of dollars, rounded to 2 decimal pleces, e.9-1.234,567.89. Enter your IRR onswer as a percent rounded to 2 decimal places, e.g., 3216. )