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. You need to advise them whether to take the project or not.

Calculate the Payback Period, NPV, and IRR for the project and determine whether they should take the project or not.

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 $31.36 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 per year and sell them at $10,400 per machine.

7. The company will incur $6,000,000 in annual fixed costs, and the variable production costs are $9,000 per RDS.

8. RTN’s tax rate is 35 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 108 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

Common:

8,000,000 shares outstanding, selling for $181.30 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 $80.20 per share and having a par value of $100.

Market:

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