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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 overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for R4.5 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 R5.3 million. In five years, the after-tax value of the land will be R5.7 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 R32 million to build. The tax rate is 35%. The company wants to use the subjective approach to this project because it is located overseas. According to analysts the risk associated with this project will have to be adjusted by 2%.

The following market data on DEIs securities apply: Debt: 230 000 7.2% coupon bonds outstanding, 25 years to maturity, selling for 108% of par; the bonds have a R1 000 par value each and make semi-annual payments. Ordinary shares: 8 800 000 shares issued, selling for R71 per share; the beta is 1.1. Preference shares: 450 000 shares of 5 percent preference shares issued, selling for R81 per share. Market: 7% expected market risk premium; 5% risk-free rate.

Required Calculate the required return for this project for DEI.

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