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 $$4\mathrm{.}3$ 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\mathrm{.}1$ million on an aftertax basis.

In five years, the aftertax value of the land will be $$5\mathrm{.}5$ 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{.}84$ million to build. The following

market data on DEl's securities is current:

Debt.

$114,0007\mathrm{.}2$ percent coupon bonds outstanding, $27$ years to maturity,

selling for $108$ percent of par; the bonds have a par value of $$2,000$ and

make semiannual payments.

Common

stock.

Preferred

stock.

$8,600,000$ shares outstanding, selling for $$70\mathrm{.}80$ per share; the beta is

$1\mathrm{.}1.$

$448,000$ shares of $5\mathrm{.}4$ percent preferred stock outstanding, selling for

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

$7$ percent expected market risk premium; $4\mathrm{.}3$ percent risk$-$free rate.

Market. $7$ percent expected market risk premium; $4\mathrm{.}3$ percent risk$-$free rate.

DEI uses G$.$M$.$ Wharton as its lead underwriter. Wharton charges DEI spreads of $7\mathrm{.}5$

percent on new common stock issues, $6\mathrm{.}5$ percent on new preferred stock issues, and

$5\mathrm{.}5$ 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 DEI

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 $$1,250,000$ 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 $2$ 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{.}3$ 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 $$6,600,000$ in annual fixed costs. The plan is to manufacture

$16,000$ RDSs per year and sell them at $$10,700$ per machine; the variable production

costs are $$9,300$ 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 rounde