Suppose you have been hired as a financial consultant to Defense Electronics,

Incorporated $($DEl$),$ 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 $$3\mathrm{.}7$ million in anticlpation 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 appralsed last week for $$6\mathrm{.}7$ million on an aftertax basis. In five

years, the aftertax value of the land will be $$7\mathrm{.}2$ 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 $$33\mathrm{.}4$ million to bulld. The following market

data on DEl's securitles are current:

Debt: $,285,000$ bonds with a coupon rate of $6\mathrm{.}8$ percent outstanding. $26$ years

to maturlty, selling for $108$ percent of par; the bonds have a $$1,000$ par

value each and make semlannual payments.

Common $,10,300,000$ shares outstanding, selling for $$75\mathrm{.}50$ per share; the beta is

stock: $,1\mathrm{.}2$

Preferred $505\mathrm{.}000$ shares of $4\mathrm{.}6$ percent preferred stock outstanding. selling for

stock: $,$$$85\mathrm{.}00$ per share. The par value is $$100.$

Market: $,6\mathrm{.}8$ percent expected market rlsk premlum; $3\mathrm{.}7$ percent rlsk$-$free rate.

DEl uses G$.$M$.$ Wharton as its lead underwriter. Wharton charges DEl spreads of $6\mathrm{.}5$

percent on new common stock Issues, $4$ percent on new preferred stock Issues, and $2$

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

ralse the funds needed to build the plant by Issulng new shares of common stock. DEI's

tax rate is $25$ percent. The project requires $$1,675,000$ in initial net working capital

Investment to get operational. Assume DEl ralses all equity for new projects externally

and that the NWC does not require floatation costs..

a$.$ Calculate the project's initjal 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 of dollars, rounded to

the nearest whole number, e$.$g$.1,234\mathrm{.}567.)$

b$.$ The new RDS project is somewhat riskler than a typical project for DEI, primarly

because the plant is belng located overseas. Management has told you to use an

adjustment factor of $+3\mathrm{.}0$ percent to account for this Increased riskiness. Calculate the

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

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

places, e$.$g$..3216.)$

c$.$ The manufacturing plant has an elght$-$year tax life, and DEI uses straight$-$lIne

depreclation 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 $$6\mathrm{.}0$ million. What is the aftertax

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

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

whole number, e$.$g$.1,234\mathrm{.}567.)$

d$.$ The company will Incur $$8,300,000$ in annual fixed costs. The plan is to manufacture

$19,750$ RDSs per year and sell them at $$11,150$ per machine; the variable production

costs are $$9,900$ per RDS$.$ What is the annual operating cash flow $($OCF$)$ from this

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

not millions of dollars, rounded to the nearest whole number, e$.$g$.,1,234\mathrm{.}567.)$

e$.$ DEI's comptroller is primarlly Interested In the Impact of DEI'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 intermedlate

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

f$.$ Finally. DEI's president wants you to throw all your calculations, assumptions, and

everything else into the report for the chlef financlal officer; all he wants to know is

what the RDS project's Intemal rate of return $($IRR$)$ and net present value $($NPV$)$ are.

$($Do not round intermediate calculations. Enter your NPV in dollars, not millions of

dollars, rounded to $2$ decimal places, e$.$g$.,1,234\mathrm{.}567\mathrm{.}89.$ Enter your IRR as a

percent rounded to $2$ decimal places, e$.$g$.,3216.)$