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 $7.65 million after taxes. In five years, the land will be worth $7.95 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build. The following market data on DEIs securities are current:

- Debt: 45,500 6.8 percent coupon bonds outstanding, 20 years to maturity, selling for 94.5 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

- Common stock: 755,000 shares outstanding, selling for $94.50 per share; the beta is 1.25.

- Preferred stock: 35,500 shares of 6.2 percent preferred stock outstanding, selling for $92.50 per share.

- Market: 7 percent expected market risk premium; 5.2 percent risk-free rate.

DEIs tax rate is 35 percent. The project requires $850,000 in initial net working capital investment to get operational.

Requirement 1: Calculate the projects Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs.

Requirement 2: 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 +1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEIs project.

Requirement 3: The manufacturing plant has an eight-year tax life, and DEI uses straightline depreciation. At the end of the project (i.e., the end of year 5), the plant can be scrapped for $1.55 million. What is the aftertax salvage value of this manufacturing plant?

Requirement 4: The company will incur $2,350,000 in annual fixed costs. The plan is to manufacture 13,500 RDSs per year and sell them at $10,900 per machine; the variable production costs are $10,100 per RDS. What is the annual operating cash flow, OCF, from this project?

Requirement 5: (a) Calculate the net present value. (b) Calculate the internal rate of return.

(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)