Suppose you have been hired as a financial consultant to ABC Inc., 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 $6 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 $9.25 million. The company wants to build its new manufacturing plant on this land; the plant will cost $14 million to build. The following market data on ABC Inc.s securities are current: Debt: 10,000 8 percent coupon bond outstanding, 15 years to maturity, selling for 92 percent pf par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 250,000 shares outstanding, selling for $70 per share; the beta is 1.4 Market Information: 8 percent expected market risk premium; 5 percent risk-free rate ABC Inc. has enough internally generated funds and has been advised to fund the entire project using the internally generated funds only. ABC Inc.s tax rate is 35 percent. The project requires $900,000 in initial investment to get operational.

a) Calculate the projects initial Time 0 cash flow, taking into account all side effects.

b) The new RDS project is somewhat riskier than a typical project for ABC, 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 ABCs project.

c) The manufacturing plant has a five-year useful life, and ABC uses straight-line depreciation. At the end of the project (i.e., the end of year 5), the plant can be scrapped for $5 million. What is the annual depreciation of this plant?

d) The company will incur $350,000 in annual fixed costs. The plan is to manufacture 10,000 RDSs per year and sell them at $10,400 per machine; the variable production costs are $8,500 per RDS. What is the annual operating cash flow, OCF, from this project?

e) Finally, ABCs 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 projects IRR and NPV are. What will you report?