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 $2.8 million in anticipationof using it as a toxic dump site for waste chemicals, but it builta piping system to safely discard the chemicals instead. The landwas appraised last week for $5.9 million on an aftertax basis. Infive years, the aftertax value of the land will be $6.3 million,but the company expects to keep the land for a future project. Thecompany wants to build its new manufacturing plant on this land;the plant and equipment will cost $32.5 million to build. Thefollowing market data on DEI’s securities are current: Debt:240,000 bonds with a coupon rate of 5.9 percent outstanding, 22years to maturity, selling for 104 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 $72.80 per share; thebeta is 1.25. Preferred stock: 460,000 shares of 3.7 percentpreferred stock outstanding, selling for $82.75 per share. The parvalue is $100. Market: 5.9 percent expected market risk premium;2.8 percent risk-free rate. DEI uses G.M. Wharton as its leadunderwriter. Wharton charges DEI spreads of 6.5 percent on newcommon stock issues, 4 percent on new preferred stock issues, and 2percent on new debt issues. Wharton has included all direct andindirect issuance costs (along with its profit) in setting thesespreads. Wharton has recommended to DEI that it raise the fundsneeded to build the plant by issuing new shares of common stock.DEI’s tax rate is 21 percent. The project requires $1,450,000 ininitial net working capital investment to get operational. AssumeDEI raises all equity for new projects externally and that the NWCdoes not require floatation costs.. a. Calculate the project’sinitial Time 0 cash flow, taking into account all side effects. (Anegative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to the nearest whole dollar amount,e.g., 1,234,567.) b. The new RDS project is somewhat riskier than atypical project for DEI, primarily because the plant is beinglocated overseas. Management has told you to use an adjustmentfactor of +1.0 percent to account for this increased riskiness.Calculate the appropriate discount rate to use when evaluatingDEI’s project. (Do not round intermediate calculations and enteryour answer as a percent rounded to 2 decimal places, e.g., 32.16.)c. The manufacturing plant has an eight-year tax life, and DEI usesstraight-line depreciation to a zero salvage value. At the end ofthe project (that is, the end of Year 5), the plant and equipmentcan be scrapped for $5.1 million. What is the aftertax salvagevalue of this plant and equipment? (Do not round intermediatecalculations and enter your answer in dollars, not millions ofdollars, rounded to the nearest whole dollar amount, e.g.,1,234,567.) d. The company will incur $7,400,000 in annual fixedcosts. The plan is to manufacture 19,525 RDSs per year and sellthem at $11,060 per machine; the variable production costs are$9,675 per RDS. What is the annual operating cash flow (OCF) fromthis project? (Do not round intermediate calculations and enteryour answer in dollars, not millions of dollars, rounded to thenearest whole dollar amount, e.g., 1,234,567.) e. DEI’s comptrolleris primarily interested in the impact of DEI’s investments on thebottom line of reported accounting statements. What will you tellher is the accounting break-even quantity of RDSs sold for thisproject? (Do not round intermediate calculations and round youranswer to nearest whole number, e.g., 32.) f. Finally, DEI’spresident wants you to throw all your calculations, assumptions,and everything else into the report for the chief financialofficer; all he wants to know is what the RDS project’s internalrate of return (IRR) and net present value (NPV) are. (Do not roundintermediate calculations. Enter your NPV in dollars, not millionsof dollars, rounded to 2 decimal places, e.g., 1,234,567.89. Enteryour IRR as a percent rounded to 2 decimal places, e.g.,32.16.)

a.Cash flow

b.Discount rate%

c.Aftertax salvage value

d.Operating cash flow

e.Break-even quantity

f.IRR%NPV