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 $7.2 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. If the land were sold today, the net proceeds would be $77 million after taxes. In five years, the land will be worth $8 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $15 million to build. The manufacturing plant has a five-year tax life, and DEI uses straight-line depreciation to 0. At the end of the project (ie., the end of Year 5), the plant can be scrapped for $2 million. The company will incur $2,500,000 in annual fixed costs. The plan is to manufacture 14,000 RDSS per year and sell them at $11,000 per machine; the variable production costs are $8,000 per RDS. The project requires $1,000,000 in initial net working capital investment to get operational (it will keep the same level of NWC through the life of the project and will be recover at the end). DEI's tax rate is 20 percent. The following market data on DEI's securities are current: Debt: Bond1: 90,000 7% coupon bonds outstanding, 25 years to maturity, selling for 95 percent of par Bond2: 100,000 8% co coupon bonds outstanding, 25 years to maturity, selling for at par. Both bonds have a $1,000 par value each and make semiannual payments. Common stock. 1,600,000 shares outstanding, selling for $95 per share; the beta is 1.2. Market data: 7% expected market risk premium; 5% risk-free rate. 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 +2 percent to account for this increased riskiness. a. Calculate the cash flow from assets (CFFA) - create a table similar to the ones done in class. b. Calculate the require rate of return on equity. c. Calculate the require rate of return on debt. d. Calculate the WACC. e. Find the NPV and the IRR of the project. Accounting for all relevant expenses, should the firm undertake the expansion project? Microsoft Word