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 $$2\mathrm{.}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\mathrm{.}8$ million. In five years, the aftertax value of the land will

be $$4\mathrm{.}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 and

equipment will cost $$34$ million to build. The following market data on DEl's securities

are current:

Debt:

$195,000$ bonds with a coupon rate of $6\mathrm{.}2$ percent 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 $1\mathrm{.}1.$

Preferred

$450,000$ shares of $4\mathrm{.}25$ percent preferred stock outstanding, selling for

stock:

$$83$ per share.

Market:

$7$ percent expected market risk premium; $3\mathrm{.}1$ percent risk$-$free rate.

DEI uses G$.$M$.$ Wharton as its lead underwriter. Wharton charges DEI 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 DEI that it

raise the funds needed to build the plant by issuing new shares of common stock. DEl's

tax rate is $25$ percent. The project requires $$1,500,000$ in initial net working capital

investment to get operational. Assume DEI raises all equity for new projects externally

and that the NWC does not requires flotation costs.

a$.$ Calculate the project's initial Time $0$ 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, rounded to the nearest

whole number, 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 $+2$ percent to account for this increased riskiness. Calculate the

appropriate discount rate to use when evaluating DEl's project. $($Do not round

intermediate calculations and enter your answer as a percent rounded to $2$ decimal

places, e$.$g$.,32\mathrm{.}16.)$

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

$,$ the plant and equipment can be scrapped for $$4\mathrm{.}9$ million. What is the aftertax

salvage value of this plant and equipment? $($Do not round intermediate calculations

and enter your answer in dollars, not millions, rounded to the nearest whole

number, e$.$g$.,1,234,567.)$

d$.$ The company will incur $$6\mathrm{.}9$ million in annual fixed costs. The plan is to manufacture

$12,100$ RDSs per year and sell them at $$11,450$ per machine; the variable production

costs are $$9,500$ per RDS$.$ What is the annual operating cash flow $($OCF$)$ from this

project? $($Do not round intermediate calculations and enter your answer in dollars,

not millions, rounded to the nearest whole number, e$.$g$.,1,234,567.)$

e$.$ DEl's comptroller is primarily interested in the impact of DEl's investments on the

bottom line of reported accounting statements. What will you tell her is the accounting

break$-$even quantity of RDSs sold for this project? $($Do not round intermediate

calculations and round your answer to nearest whole number, e$.$g$.,32.)$

f$.$ Finally, DEl'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 RDS project's internal rate of return $($IRR$)$ and net present value $($NPV$)$ are.

$($Do not round intermediate calculations. Enter your IRR as a percent rounded to $2$

decimal places, e$.$g$.,32\mathrm{.}16.$ Enter your NPV in dollars, not millions of dollars,

rounded to $2$ decimal places, e$.$g$.,1,234,567\mathrm{.}89.)$