This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (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. In order to facilitate this project, DEI purchased some land where they will build their new manufacturing plant, which cost $4.4 million on an after-tax basis. In five years, the after-tax value of the land will be $4.8 million.The plant and equipment will cost $37 million to build.

DEI's tax rate is 32 percent. The project requires $1,300,000 in initial net working capital investment to get operational. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $5.1 million.

The company will incur $6,700,000 in annual fixed costs. The plan is to manufacture 15,300 RDSs per year and sell them at $11,450 per machine; the variable production costs are $9,500 per RDS.

The following market data on DEI's securities are current:

Debt: 210,000 6.4% coupon bonds outstanding, 25 years to maturity, selling for 110 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

Common stock: 8,300,000 shares outstanding, selling for $68 per share; the beta is 1.3.

Preferred stock: 450,000 shares of preferred stock outstanding, selling for $79 per share with a dividend of $4.50.

Market: 6 percent expected market risk premium; 3.5 percent risk-free rate.

DEI uses HSOB as its lead underwriter. HSOB charges DEI 10% flotation costs on new common stock issues, 6% on new preferred stock issues, and 4% on new debt issues.Assume DEI raises all equity for new projects externally.

Calculate the NPV and the IRR of the proposed project.