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 $$7\mathrm{.}6$ 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 $$7\mathrm{.}2$ million. In five years, the after$-$tax value of the land will be $$7\mathrm{.}5$ 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

$$40\mathrm{.}1$ million to build. The following market data on DEl's securities are current:

Debt: $261,0006\mathrm{.}9$ percent coupon bonds outstanding, $30$ years to maturity, selling for $102$ percent of par; the bonds have a $$1,000$ par

value each and make semiannual payments.

Common stock: $9,510,000$ shares outstanding, selling for $$68$ per share; the beta is $1\mathrm{.}30.$

Preferred stock: $451,000$ shares of $5\mathrm{.}30$ percent preferred stock outstanding, selling for $$70$ per share and having a par value of $$100.$

Market: $7\mathrm{.}1$ percent expected market risk premium; $3\mathrm{.}7$ percent risk$-$free rate.

DEl uses G$.$ M$.$ Wharton as its lead underwriter. Wharton charges DEl spreads of $6\mathrm{.}6$ percent on new common stock issues, $4\mathrm{.}6$ percent

on new preferred stock issues, and $3\mathrm{.}1$ 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 DEl that it raise the funds needed to build the plant by issuing

new shares of common stock. DEl's tax rate is $34$ percent. The project requires $$1,410,000$ 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 $+2$ percent to account for this increased riskiness. Calculate the appropriate

discount rate to use when evaluating DEl's project. $($Do not round intermediate calculations. Round the final answer to $2$ decimal

places.$)$

Discount rate