Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly trded firm that is the market share leader in radar detection systems (RDSs). The company is tooking 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 $7.2million 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 $7.73 million after taxes. In five years, the land will be worth $8.03 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.52 million to build. The following market data on DEI's securities are current: Debt: - 92,600 7.1 percent coupon bonds outstanding, 25 years to maturity, selling for 93.7 percent of par; the bonds have a $1,000 par value each and make semiannual payments. 1,740,000 shares outatanding, selling for $95.30 per share: the beta is 1.16 . 02,000 shares of 6.35 percent preferred stock outstanding. selling for $93.30 per share. 6.8 percent expected market risk premium; 5.15 percent risk-free rate. Market: DEl's tax rate is 23 percent. The project requires $890,000 in initial net working capital 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 intermediate calculations and enter your answer in DEl's tax rate is 23 percent. The project requires $890,000 in initial net working copital investment to get operational. a. Calculate the project's Time O 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 intermediate calculations and enter your answer in dollars, not miltions of dollars, e.9., 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 +1 percent to account for this increased riskiness, Calculate the appropriate discount rate to use when evaluating DEl's project. Note: Do not round intermediate 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 DE uses straight-line depreciation. At the end of the project (i.e., the end of Year 5). the plant can be scrapped for $1.63 million. What is the aftertax salvage value of this manufocturing plant? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. d. The company will incur $2,430,000 in annual fixed costs. The plan is to manufacture 14,300 RDS5 per year and sell them at $11,700 per machine; the variable production costs ate $10,900 per RDS. What is the annual operating cash flow, OCF, from this proiect? Note: Do not round Intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. e. Calculate the project's net present value. Note: Do not round intermediate calculations and enter your answer in dollars, not militons of dollars, rounded to 2 decimal places, e.9i, 1,234,567.89 t. 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.g., 32.16. Note: Do not roond intermediate calculations and enter your answer in dollars, not millions of dollars, e.9., 1,234,567. d. The company will incur $2,430,000 in annual fixed costs. The plan is to manufacture 14,300 RDSs per year-and 5 eil them at $11,700 per machine; the variable production costs are $10,900 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 millions of dollars, e.g., 1,234,567. c. Calculate the project's net present value. Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89 f. Caiculate 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.g., 32.16
