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Suppose you have been hired as a financial consultant to DefenseElectronics, Inc. (DEI), a large, publicly traded firm that is themarket share leader in radar detection systems (RDSs). The companyis looking at setting up a manufacturing plant overseas to producea new line of RDSs. This will be a five-year project. The companybought some land three years ago for $7 million in anticipation ofusing it as a toxic dump site for waste chemicals, but it built apiping system to safely discard the chemicals instead. If the landwere sold today, the net proceeds would be $7.76 million aftertaxes. In five years, the land will be worth $8.06 million aftertaxes. The company wants to build its new manufacturing plant onthis land; the plant will cost $13.64 million to build. Thefollowing market data on DEI’s securities are current:

Debt:		46,600 6.9 percent coupon bonds outstanding, 21 years tomaturity, selling for 93.4 percent of par; the bonds have a $1,000par value each and make semiannual payments.
Common stock:		766,000 shares outstanding, selling for $95.60 per share; thebeta is 1.13.
Preferred stock:		36,600 shares of 6.25 percent preferred stock outstanding,selling for $93.60 per share.
Market:		7.05 percent expected market risk premium; 5.25 percentrisk-free rate.

DEI’s tax rate is 34 percent. The project requires $905,000 ininitial net working capital investment to get operational.

a.
Calculate the project’s Time 0 cash flow, taking into account allside effects. Assume that any NWC raised does not requirefloatation costs. (A negative answer should be indicated bya minus sign. Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, e.g.,1,234,567.)

Time 0 cash flow           $

b.
The new RDS project is somewhat riskier than a typical project forDEI, primarily because the plant is being located overseas.Management has told you to use an adjustment factor of +3 percentto account for this increased riskiness. Calculate the appropriatediscount rate to use when evaluating DEI’s project. (Do notround intermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)

Discount rate            %

c.
The manufacturing plant has an eight-year tax life, and DEI usesstraight-line depreciation. At the end of the project (i.e., theend of Year 5), the plant can be scrapped for $1.66 million. Whatis the aftertax salvage value of this manufacturing plant?(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, e.g.,1,234,567.)

Aftertax salvage value           $

d.
The company will incur $2,460,000 in annual fixed costs. The planis to manufacture 14,600 RDSs per year and sell them at $12,000 permachine; the variable production costs are $11,200 per RDS. What isthe annual operating cash flow, OCF, from this project? (Donot round intermediate calculations and enter your answer indollars, not millions of dollars, e.g., 1,234,567.)

Operating cash flow           $

e.
Calculate the project's net present value. (Enter youranswer in dollars, not millions of dollars, e.g., 1,234,567. Do notround intermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

Net present value           $

Calculate the project's internal rate of return. (Do notround intermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)

Internal rate of return            %