Suppose you have been hired os a financial consultant to Defense Electronics,

Incorporated $($DEI$),$ a large, publicly traded firm that is the market share lesder in radar

detection systems $($RDSs$).$ The compony is looking st setting up o monufacturing plant

oversess to produce a new line of RDSs$.$ This will be o five$-$year project. The compony

bought some land three years $sg$ of $$3\mathrm{.}7$ million in anticipstion of using it $s$ toxic

dump site for waste chemicals, but it built $$ piping system to sofely discord the chemicsls

instead. The land was oppraised last week for $$4\mathrm{.}5$ million on on aftertax bosis. In five

years, the aftertax value of the land will be $$4\mathrm{.}9$ million, but the company expects to

keep the land for a future project. The compony wants to build its new manufscturing

plant on this land; the plant and equipment will cost $$31\mathrm{.}36$ million to build. The following

morket dato on DEl's securities is current:

Debt

$111,0007\mathrm{.}2$ percent coupon bonds outstanding, $27$ years to maturity,

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

moke semiannusl poyments.

Common $8,000,000$ shares outstanding, selling for $$70\mathrm{.}20$ per shere; the bets is

stock:

$1\mathrm{.}1.$

Preferred $442,000$ shares of $6$ percent preferred stock outstanding. selling for

stock. $$80\mathrm{.}20$ per share; the stock has o por value of $$100.$

Morket. $7$ percent expected morket risk premium; $4\mathrm{.}9$ percent risk$-$free rate.

DEl uses G$.$M$.$ Wharton os its lesd underwriter. Wharton charges DEl spreads of $6\mathrm{.}5$

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

$4\mathrm{.}5$ percent on new debt issues. Wharton hos included all direct and indirect issuance

costs $($along with its profit$)$ in setting these spresds. Wharton hos recommended to DEI

that it raise the funds needed to build the plant by issuing new shores of common stock.

DEl's tox rote is $23$ percent. The project requires $$1,100,000$ in initisl net working copital

investment to get operationsl. Assume Wharton raises all equity for new projects

externally.

a$.$ Colculate the project's initisl Year $0$ cosh flow, taking into account sll side effects.

Assume that the net working copitsl will not require flotstion costs. $($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, 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, primsrily

becouse the plant is being locoted overseas. Management has told you to use on

adjustment factor of $2$ percent to sccount for this incressed riskiness. Colculate the

sppropriste discount rate to use when evaluating DEl's project. $($Do not round

Intermedlate calculations and enter your answer as a percent rounded to $2$ decimal

places, e$.$g$.,32\mathrm{.}16.)$

c$.$ The monufacturing plant has on eight$-$year tox life, and DEl uses stroight$-$line

deprecistion. At the end of the project $($that is$,$ the end of Year $5),$ the plant and

equipment can be scropped for $$3\mathrm{.}7$ million. What is the stertax salvoge volue of this

plant and equipment? $($Do not round Intermedlate calculations and enter your

answer in dollars, not millions of dollars, rounded to the nearest whole number,

e$.$g$.,1,234,567.)$

d$.$ The compony will incur $$6,000,000$ in annusl fixed costs. The plan is to manufacture

$14,600$ RDSs per year and sell them at $$10,400$ per machine; the variable production

costs ore $$9,000$ per RDS$.$ What is the onnusl opersting cosh 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 impoct of DEl's investments on the

bottom line of reported accounting statements. What will you tell her is the sccounting

bresk$-$even qusntity of RDSs sold for this project? $($Do not round Intermedlate

calculations and round your answer to the nearest whole number, e$.$g$..32.)$

f$.$ Finally, DEl's president wants you to throw all your calculstions, sssumptions, and

everything else into the report for the chief finsucial officer; all he wants to know is

whst the RDS project's internol rote 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$.,1,234\mathrm{.}567\mathrm{.}89.$ Enter your IRR

answer as a percent r