Suppose you have been hired as a financial consultant to Raytheon Company (RTN), 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. Calculate the Payback Period, NPV, and IRR for the project and determine whether they should take the project or not using the following assumptions:

1. The company bought some land three years ago for $3.7 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 $4.5 million.

2. In five years, the after-tax value of the land will be $4.9 million.

3. The plant and equipment will cost $21 million to build.

4. The manufacturing plant has an eight-year tax life, and RTN uses straight-line depreciation. At the end of the project, the plant and equipment can be scrapped for $3.7 million.

5. The project requires $1,100,000 in initial net working capital investment to get operational.

6. The plan is to manufacture 13,000 RDSs in the first year and sell them at $10,400 per machine. The following 4 years, the number to be produced grows by 15%, 20%, 25%, and 25% annually, i.e. year over year. We will continue to sell them at $10,400 each year.

7. The company will incur $6,000,000 in annual fixed costs, and the variable production costs are $9,000 per RDS in the first year. The following 4 years, variable production costs will grow at a rate of 5%, 3%, 2%, and 2% annually, i.e. year over year.

8. RTN's tax rate is 20 percent.

9. The following market data on RTN's securities is current:

Debt:

222,000, 7.2 percent coupon bonds are outstanding, 25 years to maturity, selling for 97.586 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

Common:

8,000,000 shares outstanding, selling for $150 per share; you have stock prices and S&P 500 index value for the past five years.

Preferred:

442,000 shares of 5 percent preferred stock outstanding, selling for $104.63 per share and having a par value of $100.

Market:

8 percent expected market risk premium; 3 percent risk-free rate.

10. You will need to estimate RTN's beta using the following data. To do so, you need to convert the prices to returns and then use the Excel 'slope' command.

Date RTN S&P

7/1/2014 null null

8/1/2014 86.670341 2003.369995

9/1/2014 91.420364 1972.290039

10/1/2014 94.013809 2018.050049

11/1/2014 96.565971 2067.560059

12/1/2014 97.896355 2058.899902

1/1/2015 90.547585 1994.98999

2/1/2015 98.990784 2104.50000

3/1/2015 99.42765 2067.889893

4/1/2015 95.230064 2085.51001

5/1/2015 94.55246 2107.389893

6/1/2015 87.611664 2063.110107

7/1/2015 100.579956 2103.840088

8/1/2015 96.910439 1972.180054

9/1/2015 100.736702 1920.030029

10/1/2015 108.241692 2079.360107

11/1/2015 115.06987 2080.409912

12/1/2015 115.533745 2043.939941

1/1/2016 118.975739 1940.23999

2/1/2016 115.524414 1932.22998

3/1/2016 114.386429 2059.73999

4/1/2016 117.856377 2065.300049

5/1/2016 121.676949 2096.949951

6/1/2016 127.569885 2098.860107

7/1/2016 130.929184 2173.600098

8/1/2016 132.204987 2170.949951

9/1/2016 128.431198 2168.27002

10/1/2016 128.884079 2126.149902

11/1/2016 141.846573 2198.810059

12/1/2016 138.773315 2238.830078

1/1/2017 137.445999 2278.870117

2/1/2017 146.970734 2363.639893

3/1/2017 145.397568 2362.719971

4/1/2017 147.981384 2384.199951

5/1/2017 157.191605 2411.800049

6/1/2017 154.766739 2423.409912

7/1/2017 165.451981 2470.300049

8/1/2017 175.315338 2471.649902

9/1/2017 179.717224 2519.360107

10/1/2017 173.571899 2575.26001

11/1/2017 184.905304 2584.840088

12/1/2017 181.71312 2673.610107

1/1/2018 202.114105 2823.810059

2/1/2018 211.301773 2713.830078

3/1/2018 209.660004 2640.870117

4/1/2018 199.090546 2648.050049

5/1/2018 204.336914 2705.27002

6/1/2018 188.419128 2718.370117

7/1/2018 193.149582 2816.290039

8/1/2018 195.384338 2901.52002

9/1/2018 202.45752 2913.97998

10/1/2018 171.480484 2711.73999

11/1/2018 172.498352 2760.169922

12/1/2018 150.864746 2506.850098

1/1/2019 163.015121 2704.100098

2/1/2019 184.524887 2784.48999

3/1/2019 180.151703 2834.399902

4/1/2019 175.709244 2945.830078

5/1/2019 173.55304 2752.060059

6/1/2019 172.936417 2941.76001

7/1/2019 181.300766 2980.379883