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 Defence Electronics Inc. $($DEI$),$ a large, publicly traded firm that is the market share leader in radon 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 $$9\mathrm{.}3$ million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $$8\mathrm{.}9$ million. In five years, the after$-$tax value of the land will be $$9\mathrm{.}2$ million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $$41\mathrm{.}8$ million to build. The following market data on DEI$$s securities are current:

Debt: $278,0008\mathrm{.}6$ percent coupon bonds outstanding, $30$ years to maturity, selling for $105$ percent of par; the bonds have a $$1,000$ par value each and make semiannual payments.

Common stock: $9,680,000$ shares outstanding, selling for $$85$ per share; the beta is $1\mathrm{.}20.$

Preferred stock: $468,000$ shares of $6\mathrm{.}15$ percent preferred stock outstanding, selling for $$87$ per share and having a par value of $$100.$

Market: $8\mathrm{.}8$ percent expected market risk premium; $5\mathrm{.}4$ percent risk$-$free rate.

DEI uses G$.$ M$.$ Wharton as its lead underwriter. Wharton charges DEI spreads of $8\mathrm{.}3$ percent on new common stock issues, $6\mathrm{.}3$ percent on new preferred stock issues, and $4\mathrm{.}8$ 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. DEI$$s tax rate is $35$ percent. The project requires $$1,580,000$ in initial net working capital investment to get operational. Assume DEI raises all equity for new projects externally.

a$.$ Calculate the project$$s initial Time $0$ cash flow, taking into account all side effects. Assume that the net working capital will not require flotation costs. $($Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to the nearest whole dollar amount. Enter the answer in dollars. Omit $ sign in your response.$)$

Cash flow $

b$.$ 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 $+1$ percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI$$s project. $($Do not round intermediate calculations. Round the final answer to $2$ decimal places.$)$

Discount rate

$\%$

c$.$ 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 $$10\mathrm{.}3$ million. What is the after$-$tax salvage value of this plant and equipment? $($Do not round intermediate calculations. Enter the answer in dollars. Omit $ sign in your response.$)$

After$-$tax salvage value $

d$.$ The company will incur $$8,080,000$ in annual fixed costs. The plan is to manufacture $19,800$ RDSs per year and sell them at $$12,700$ per machine; the variable production costs are $$11,250$ per RDS$.$ What is the annual operating cash flow $($OCF$)$ from this project? $($Do not round intermediate calculations. Enter the answer in dollars. Omit $ sign in your response.$)$

Operating cash flow $

e$.$ DEI$$s controller is primarily interested in the impact of DEI$$s investments on the bottom line of reported accounting statements. What will you tell him is the accounting break$-$even quantity of RDSs sold for this project? $($Do not round intermediate calculations. Round the final answer to the nearest whole dollar amount. Enter the answer in dollars.$)$

Break$-$even quantity

units

f$.$ Finally, DEI$$s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all she wants to know is what the RDS project$$s IRR and NPV are. What will you report? $($Enter the NPV answer in dollars. Do not round intermediate calculations. Round the final answers to $2$ decimal places. Omit $ sign in your response.$)$

IRR

$\%$

NPV $