You have been hired as a financial analyst for Relentless Enterprises Inc. (REI), a large, publicly traded firm that is the market share leader in high-end smart home devices (SHDs). The company is looking to set up a manufacturing plant overseas to produce a new line of SHDs. The will be a five-year project. The company bought some land three years ago for $7.9 million in the anticipation of using it as a toxic dumpsite for chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $8.4 million on an after-tax basis. In five years the after-tax value of the land will be estimated at $9.1 million, but the company expects to keep the land for a future project. The company wants to build the new manufacturing plant on this land. The plant will cost $41 million to build. The following market data on REIs securities are current:

Debt: 225,000 6.7% coupon bonds outstanding, 25 years to maturity, selling for 103 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

Common stock: 9,400,000 shares outstanding, selling for $71 per share. The beta is 1.3

Preferred stock: 475,000 shares of 4.3% preferred stock outstanding, selling for $84 per share

Market rates: Market risk premium = 6%; risk free rate = 2%

REI uses Pacific Securities as its lead underwriter. Pacific charges REI spreads of 5% on new common stock issues, 4% on new preferred share issues, and 3% on new debt issues. Pacific has included all direct and indirect costs (along with its profit) in setting these spreads. Pacific has recommended to REI that it raise the funds needed to build the plant by issuing new shares of common stock. REIs tax rate is 35%. The project requires $1,450,000 in initial net working capital investment to get operational. Assume Pacific raises all equity for new projects externally.

Required:

(a) (3 marks) Calculate the projects initial Time 0 cash flow, taking into account all factors and side effects.

(b) (3 marks) The new SHD project is somewhat riskier than a typical project for REI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +8% to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating REIs project.

(c) (3 marks) The manufacturing plant belongs to a CCA class 43 (30%). At the end of the project (that is, the end of year five), the plant can be scrapped for $6.1 million. What is the PVCCATS of this plant and equipment?

(d) (3 marks) The company will incur $7,900,000 in annual fixed costs. The plan it to manufacture 18,900 SHDs per year and sell them for $13,450 per unit. The variable production costs are $9,500 per SHD. What is the operating cash flow (OCF) from this project?