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 to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $5.8 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 $6.5 million. In five years, the after-tax value of the land will be $6.2 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 $36 million to build. The following market data on DEIs securities:

Debt: 200,000 bonds with a coupon rate of 5.8 percent outstanding, 25 years to maturity, selling at a discount of 6 percent to its par; the bonds have a $1,000 par value each and make semiannual payments.

Common stock: 8,600,000 shares outstanding, selling for $65 per share; the beta is 1.25.

Preferred stock: 2,000,000 shares of 6 percent preferred stock outstanding, selling for $52 per share; the stock has a par value of $50.

Market: 8 percent expected market risk premium; 3 percent risk-free rate

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 7 percent on new common stock issues, 4.5 percent on new preferred stock issues, and 3 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. DEIs tax rate is 21 percent. The project requires $2.5 million in initial net working capital investment, which is also externally financed, to get operational.

i. Calculate the projects initial Year 0 cash flow, taking into account all side effects.

ii. Calculate the appropriate discount rate to use when evaluating DEIs project.

iii. The manufacturing plant has an eight-year tax life and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant and equipment can be scrapped for $10 million. What is the after-tax salvage value of this plant and equipment?