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 $4.1 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 $6.9 million on an aftertax basis. In five years, the aftertax value of the land will be $7.6 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 $27.8 million to build. The following market data on DEl's securities are current: Debt: Common stock: Preferred stock: Market: 160,000 bonds with a coupon rate of 7.2 percent outstanding, 25 years to maturity, selling for 107 percent of par; the bonds have a $2.000 par value each and make semiannual payments. 10,700,000 shares outstanding, selling for $76.70 per share: the beta is 1.2 . 525,000 shares of 5 percent preferred stock outstanding. selling for $86.00 per share. The par value is $100. 6.8 percent expected market risk premium; 4.1 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, 4.5 percent on new preferred stock issues, and 2.5 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 24 percent. The project requires $1,775,000 in initial net working capital DEI's tax rate is 24 percent. The project requires $1 all equity for new projects externally Investment to get operational. Assume OH ralses all equily for new projects encemally arid that the NWC does not require floatation costs. a. Calculate the project's initiat Time 0 cash flow, taking into account all side eflecti. (A negative answer should be indicated by a minus sign. Do not round intermediote colculations and enter your answor in dollers, not millions of dollars, reunded to the nearest whole number, e.g., 1,234,567.) b. The new RDS project is somewhat ilskier than a typical project for DEl. primaily because the plant ts being located ovesseas. Management has told you to ine an. adjustment factor of +2.5 percent to account for this increased inkiness. Calculate itin. appropriate discount rate to use when cvaluating Ders project. (De not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32,16.) c. The mamulacturing plant has an eight year tax life, and Det uses stralght line depreciation to a zero salvage value. At the end of the project ghat is, the end of Year 5). the plant and equipment can be scrapped for $6.4 million. What is tihe afterax. salvage value of this plant and equipment? (Do not round inermediete calculotions and enter your onswer in dollorlh, not millions of dollors, rounded to the neorest whole number, e.gin 1,234,567.) d. The company will incur $8,700,000 in annaal fixed costs. The plan is to manutacture 19.850 RDSs per year and sell them at $11,190 per machine; the variable production 19,850 RDS per year and seth them at $1, costs are $10,000 per RDS. What is the annual operating cash flow (OCh from this project? (Do not round intermediate calculations and enter your answer in dollers. not millions of dollars, rounded to the nearest whole number, e.9., 1,234,567.) e. DEl's comptroller is primarily interested in the impact of DE's invertinents 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 intermediete colculotions and round your onswer to nearest whole number, 0.9,32. 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 dollors, not millions of dollars, rounded to 2 decimal places, e.9., 1,234,567.89. Enter your IRR os a
