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 $$4\mathrm{.}2$ 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 $$5$ million on an aftertax basis.

In five years, the aftertax value of the land will be $$5\mathrm{.}4$ 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 $$31\mathrm{.}76$ million to build. The following

market data on DEl's securities is current:

Debt. $,113,0007\mathrm{.}4$ 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 $8,500,000$ shares outstanding, selling for $$70\mathrm{.}70$ per share; the beta is

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

Preferred $447,000$ shares of $5\mathrm{.}5$ percent preferred stock outstanding, selling for

stock. $,$$$80\mathrm{.}70$ per share; the stock has a par value of $$100.$

Market. $8$ percent expected market risk premium; $4\mathrm{.}4$ percent risk$-$free rate.

DEI uses G$.$M$.$ Wharton as its lead underwriter. Wharton charges DEI spreads of $6$

percent on new common stock issues, $5$ percent on new preferred stock issues, and $4$

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 DEl that it

raise the funds needed to build the plant by issuing new shares of common stock. DEl's

tax rate is $23$ percent. The project requires $$1,225,000$ in initial net working capital

investment to get operational. Assume Wharton raises all equity for new projects

externally.

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

Assume that the net working capital will not require flotation costs. $($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$.,1,234,567.)$

b$.$ The new RDS project is somewhat riskier than a typical project for DEl, primarily

because the plant is being 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 DEl's project. $($Do not round

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

places, e$.$g$.,32\mathrm{.}16.)$

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

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

equipment can be scrapped for $$4\mathrm{.}2$ million. What is the aftertax salvage value of this

plant and equipment? $($Do not round intermediate calculations and enter your

answer in dollars, not millions of dollars, rounded to the nearest whole number,

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

d$.$ The company will incur $$6,500,000$ in annual fixed costs. The plan is to manufacture

$18,000$ RDSs per year and sell them at $$10,650$ per machine; the variable production

costs are $$9,250$ per RDS$.$ What is the annual operating cash flow $($OCF$)$ from this

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

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

e$.$ DEl's comptroller is primarily interested in the impact of DEl'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 intermediate

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 financial 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 intermediate calculations. Enter your NPV answer in dollars, not

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

answer as a percent rounded to $2$ deci