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

Incorporated $($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 $$5\mathrm{.}2$ million in anticipation of using it as a toxic

dump site for waste chemicals, but it bult a piping system to safely discard the

chemicals instead. The land was appralsed last week for $$6$ million on an aftertax basis.

In five years, the aftertax value of the land will be $$6\mathrm{.}4$ million, but the company expects

to keep the land for a future project. The company wants to butld Its new manufacturing

plant on this land; the plant and equlpment will cost $$32\mathrm{.}56$ million to butld. The

following market data on DEI's securities is current:

Debt:

$119,0007\mathrm{.}4$ percent coupon bonds outstanding. $22$ years to maturity,

selling for $109$ percent of par; the bonds have a par value of $$2,000$ and

make semiannual payments.

Common $9,500,000$ shares outstanding, selling for $$71\mathrm{.}70$ per share; the beta is

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

Preferred $457\mathrm{.}000$ shares of $4\mathrm{.}9$ percent preferred stock outstanding. selling for

stock.

Market $,8$ percent expected market risk premlum; $3\mathrm{.}8$ percent risk$-$free rate.

DEI uses G$.$M$.$ Wharton as Its lead underwriter. Wharton charges DEI spreads of $7$

percent on new common stock issues, $6$ percent on new preferred stock issues, and $5$

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 bulld the plant by issulng new shares of common stock. DEI's

tax rate is $22$ percent. The project requires $$1,475,000$ in initial net working capital

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

externally.

Calculate the project's Initjal Year $0$ cash flow, taking into account all side effects.

Assume that the net working capital will not require flotation costs. $($A negatlve

answer should be Indiceted by a minus sign. Do not round Intermedlete

calculations and enter your answer In dollars, not millions of dollars, rounded to

the nearest whole number, e$.$g$.,1,234,567.)$

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

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

adjustment factor of $3$ 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$.,32\mathrm{.}16.)$

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

depreclation. At the end of the project $($that is$,$ the end of Year $5),$ the plant and

equipment can be scrapped for $$5\mathrm{.}2$ million. What is the aftertax salvage value of this

plant and equlpment? $($Do not round Intermedlate calculations and enter your

answer In dollars, not mllilions of dollors, rounded to the nearest whole number,

e$.$g$.,1,234,567.$

d$.$ The company will incur $$7,500,000$ in annual fixed costs. The plan is to manufacture

$20,500$ RDSs per year and sell them at $$11,150$ per machine; the variable production

costs are $$9,750$ 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$.,1,234,567.)$

e$.$ DEl's comptroller is primarly interested in the impact of DEI's Investments on the

bottom Iine 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 the nearest whole number, e$.$g$.,32.)$

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

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

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

$($Do not round Intermedlate calculations. Enter your NPV answer In dollars, not

millions of dollors, rounded to $2$ decimal places, e$.$g$.,1,234,567\mathrm{.}89.$ Enter your IRR

answer as a percent rounded to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$