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 $$4\mathrm{.}4$ 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 $$6\mathrm{.}6$ million

on an aftertax basis. In five years, the aftertax value of the

land will be $$7\mathrm{.}9$ 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 $$30\mathrm{.}2$ million to build. The following

market data on DEI's securities are current:

Debt: $,175,000$ bonds with a coupon rate of $7\mathrm{.}5$ percent

outstanding, $23$ years to maturity, selling for $105$

percent of par; the bonds have a $$2,000$ par

value each and make semiannual payments.

Common $11,000,000$ shares outstanding, selling for

stock: $,$$$77\mathrm{.}60$ per share; the beta is $1\mathrm{.}15.$

Preferred $540,000$ shares of $5\mathrm{.}3$ percent preferred stock

stock: outstanding, selling for $$86\mathrm{.}75$ per share. The

par value is $$100.$

Market: $6\mathrm{.}5$ 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 $7$ percent on new common stock

issues, $4\mathrm{.}5$ percent on new preferred stock issues, and $2\mathrm{.}5$

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 DE

that it raise the funds needed to build the plant by issuing

new shares of common stock. DEl's tax rate is $22$ percent

The project requires $$1,850,000$ in initial net working

capital investment to get operational. Assume DEI raises all

equity for new projects externally and that the NWC does

not require floatation costs..

a$.$ Calculate the project's initial 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 dollar

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

b$.$ 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 $+1\mathrm{.}5$ percent to account for this

increased riskiness. Calculate the appropriate discount

rate to use when evaluating DEI'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 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{.}7$

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 dollar

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

d$.$ The company will incur $$9,000,000$ in annual fixed costs.

The plan is to manufacture $19,925$ RDSs per year and sell

them at $$11,220$ per machine; the variable production

costs are $$10,075$ 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 dollar amount, e$.$g$.,1,234,567.)$

e$.$DEl's comptroller is primarily 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 intermediate calculations and

round your answer to 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 in dollars, not millions of

dollars, rounded to $2$ decimal places, e$.$g$.,$

$1,234,567\mathrm{.}89.$ Enter your IRR as a percent rounded to $2$

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