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. The company is looking at setting up a manufacturing plant overseas to produce a new line of radars. This will be a five year project. The company bought some land three years ago for $6 million. If the land were sold today, the net proceeds would be $7.4 million. The company wants to built the new manufacturing plant on this land. The plant will cost $8.8 million to build. The following market data on DEIs securities are:

Debt

15,000 8 percent coupon bonds outstanding, 20 years to maturity, selling for 96 percent of par; the bonds have a $1000 par value each and make semi annual payments.

Preference Shares:

20,000 shares of 6 percent preference shares, selling for $78 per shares

Ordinary Shares:

300,000 shares outstanding, selling for $68 per share; the beta is 1.25

Market:

7.5 percent expected market risk premium, 5.2 percent risk free rate.

DEIs tax rate is 34%. The project requires $825,000 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, the plant can be scrapped for $1.75 million. The company will incur $1.050,000 in annual fixed costs. The plan is to manufacture 11,000 Radars per year and sell them at $10,000 per machine. The variable production costs are $9,200 per radar.

Using NPV analysis, advise the company whether they should proceed with this project or not. In your analysis, assume that the risk of the project is the same as that of the company.