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 flve-year project. The company bought some land three years ago for $7.3 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. If the land were sold today, the net proceeds would be $7.8 million after taxes. In flve years, the land will be worth $8.1 million after taxes. The company wants to bulid its new manufacturing plant on this land; the plant will cost $13.8 million to bulld. The following market data on DEl's securities are current: Debt : Common stock: Preferred stock: Market: 94,000 6:8 percent coupon bonds outstanding, 27 yesro to maturity, solling for 93.0 percent of par; the booda have a $1,000 par value each and make seniansul paysente. each and make seniansusi payeents. beta is 1.09 . 89,000 ahares of 6,25 percent preterred stock outseanding, selling for $94.00 per ahare. 7,2 percent expeoted market riak preniunj 5.15 percent riak-free rate. DEl's tax rate is 25 percent. The project requires $925,000 in initlal net working copital investment to get operational. a. Calculate the project's Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. Note: A negative answer should be indicated by a minus sign. Do not round Intermedlate calculations and enter your answer in dollars, not millions of dollars, 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. Note: Do not round Intermedlate calculations and enter your answer as a percent rounded to 2 decimal places, e.g. 32.16. c. The manufacturing plant has an eight-year tax life, and DEl uses straight-line depreclation. At the end of the project f.e, the end of Year 5), the plant can be scrapped for $1.7 million. What is the aftertax salvage value of this manufacturing plant? Note: Do not round intermedlate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. d. The company will incur $2,500,000 in annual foed costs. The plan is to manufocture 15,000 RDSs per year and seil them at $12,400 per machine; the variable production costs are $11,600 per RDS. What is the annual operating cash flow, OCF, from this project? Note: Do not round intermediate calculations and enter your answer in dollars, not miltions of dollars, e.9., 1,234,567. e. Calculate the project's net present value. Note: Do not round Intermedlate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89 f. Calculate the project's internal rate of return. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.9., 32.16
