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Suppose you have been hired as a financial consultant to Defense Electronics. Incorporated (DE0, a large, publicly traded firm that is the market share leader in rader detection systems (RDSs). The company is looking at sotting up a manufscturing plant overseas to produce a new line of RDSs. This wil be a five-year project. The company bought some land three years ago for $4.8 milion in anticipation of using is as a teak cump site for waste chemicals, but if buit a piping system to salely discard the chemicals instead. The land was appraised last week for $5.6 million on an aftertas basis. In five years, the aftertax value of the land will be $5 million, but the company expects to keep the land for a future project. The company wants to bulid is nent manufacturing plant on this land, the plant and equipment will cost $32.24 million to buld. The following market data on Oer's securities is current: Debt 17,0007.2 percent coupon bonds outstanding. 24 years to maturity. selting for 108 percent of par; the bonds have a par value of $2,000 and make semiannual payments. Common stock: 9,100,000 shares outstanding, selling for 57.30 per share: the beta is 14 Preferred stock: Marker 453,000 shares of 4.5 percent preferred stock outstanding. seling for $81.30 per share; the stock has a par value of $100 7 percent expected market risk premium, 3.4 peccent cikiffee rate DEl uses G.M. Wharton as its lead underwriter. Whanton charges Del spleads of 7 percent on new common stock issues, 6 percent on new preferred stock issues, and 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 Oel that it raise the funds needed to build the plant by issuing new shares of cammon stock. Ders tax rate is 23 percent. The project requires $1,375,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally. a. Calculate the project's intial Year 0 cash flow, toking into account at sise effects. Assume that the net working capital will not require fiotation costi. (A negabiv. answer should be indicated by o minus ilgn. Do not round intectmediats calculations and enter your answer in dollars, not millions of dollass, rounded to the nearest whole number, e.g., 1,234,567.) b. The new RDS project is somewhiot riskier than o typical project for DEL primaly because the plant is being located overseas. Management has told you to use on adjustment foctor of 2 percent to account for this increased riskiness Caliculate the appropriate discount rate to use when evolusting DE's project. 100 not round intermediate calculations and enter your answer as a percent rounded to 2 declimal places, e.g., 32.16.) c. The manufacturing plant has an eight-year tax life and DEI utes straghtine depreciation, At the end of the project phot is, the end of Year 5 , se plant and equipment can be scrapped for $4.8 miltion. What is the atertax salvage value of this plant and squipment? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number. e.9., 1,234,567 ) d. The company will incur $7300,000 in annual foed costs. The plan is is manutacture 18,500 RDSs per year and selt them at $10,950 per machine; the variable prodaction costs are $9,550 per RDS. What is the annual operming canh fow (OCF) from this project? (Do not round intermediate calculations and enter your antwer in dollars. not millions of dollars, rounded to the nearest whole number, 9.9,1,234,567 ) e. Der's comptroller is primarly interested in the impoct of DErs investuments 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 intermediate calculations and round your answer to the nearest whole number, e.9. 32.) 2. Finally, DEI's president wants you to throw all your calculations, assurgotons, and everything else into the report for the chief financial officer, all he wants to khow is what the RDS project's internal rate of retum (RRR) and net present value ONPV are (Do not round intermediate calculations. Enter your NPV answer in dollars, not answer as a percent rounded to 2 decimal places, e.9, 32.16.)
