Suppose you have been hired as a financial consuitant 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 RDS5. This will be a five-year project. The company bought some land three years ago for $7.3 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 soid today, the net proceeds would be $7,79 million after taxes. In five years, the land will be worth $8.09 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.76 million to build. The following market data on DEl's securities are current: Debta 93,8007.2 percent coupon bonds outatanding, 26 years to maturity, selling for 93.1 percent of par; the bonde have a $1,000 par value each and make semiannual paysent: . Common stock: 1,860,000 shares outstanding, selling for 395.90 per whare; the Preferred gtock: 8, D00 shares of 6.4 percent preferred stock outstanding, aelifng 7.15 percent expected market riek premiums 5,1 percent riak-free rate. DEl's tax rate is 24 percent. The project requires $920,000 in initial net working capital investment to get operational. DEl's tax rate is 24 percent. The project requires $920,000 in initial net working capital investment to get operational. a. Calculate the project's Time 0 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, e.g., 1,234,567. 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 +3 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 2 decimal places, e.g., 32.16. c. The manufacturing plant has an eight-year tax life, and DEl uses straight-line depreciation. At the end of the project fi.e., the end of Year 5 ), the plant can be scrapped for $1.69 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, e.g., 1,234,567. d. The company will incur $2,490,000 in annual fixed costs. The plan is to manufacture 14,900 RDSs per year and sell them at $12,300 per machine; the variable production costs are $11,500 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, e.g., 1,234,567. 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 2 decimal places, e.g., 1,234,567.89 f. Caiculate the project's internal rate of return. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16
