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 $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. If the land were sold today, the net proceeds would be $7.78 million after taxes. In five years, the land will be worth $8.08 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.72 million to build. The following market data on DEI's securities are current: Debt: 46, 800 7.1 percent coupon bonds outstanding, 19 years to maturity, selling for 93.2 percent of par; the bonds have a $1.000 par value each and make semiannual payments. Common stock: 768.000 shares outstanding, selling for $95.80 per share; the beta is 1.11. Preferred stock: 36, 800 shares of 6.35 percent preferred stock outstanding, selling for $93.80 per share. Market: 7.15 percent expected market risk premium; 5.35 percent risk-free rate DEI's tax rate is 38 percent. The project requires $915,000 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. Time 0 cash flow $ 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 DEI's project. Discount rate % c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $1.68 million. What is the after tax salvage value of this manufacturing plant? After tax salvage value $ d. The company will incur $2, 480,000 in annual fixed costs. The plan is to manufacture 14, 800 RDSs per year and sell them at $12, 200 per machine; the variable production costs are $11, 400 per RDS. What is the annual operating cash flow, OCF, from this project? Operating cash flow $ Calculate the project's net present value. Net present value $ Calculate the project's internal rate of return. Internal rate of return %
