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 $3.6 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 $6.7 million on an aftertax basis. Infive years, the aftertax value of the land will be $7.1 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 $33.3 million to build. Thefollowing market data on DEI’s securities are current:

Debt:  
280,000 bonds with a coupon rate of 6.7 percent outstanding, 25years to maturity, selling for 107 percent of par; the bonds have a$1,000 par value each and make semiannual payments.
      
Common stock:  
10,200,000 shares outstanding, selling for $75.20 per share; thebeta is 1.15.
      
Preferred stock:  
500,000 shares of 4.5 percent preferred stock outstanding, sellingfor $84.75 per share. The par value is $100.
      
Market:  
6.7 percent expected market risk premium; 3.6 percent risk-freerate.

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEIspreads of 7.5 percent on new common stock issues, 5 percent on newpreferred stock issues, and 3 percent on new debt issues. Whartonhas included all direct and indirect issuance costs (along with itsprofit) in setting these spreads. Wharton has recommended to DEIthat it raise the funds needed to build the plant by issuing newshares of common stock. DEI’s tax rate is 24 percent. The projectrequires $1,650,000 in initial net working capital investment toget operational. Assume DEI raises all equity for new projectsexternally and that the NWC does not require floatationcosts..

a.Calculate the project’s initial Time 0 cash flow, taking intoaccount all side effects. (A negative answer should be indicated bya minus sign.
b.The new RDS project is somewhat riskier than a typical projectfor DEI, primarily because the plant is being located overseas.Management has told you to use an adjustment factor of +2.5 percentto account for this increased riskiness. Calculate the appropriatediscount rate to use when evaluating DEI’s project.
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 $5.9 million. What is the aftertax salvagevalue of this plant and equipment?
d.The company will incur $8,200,000 in annual fixed costs. The planis to manufacture 19,725 RDSs per year and sell them at $11,140 permachine; the variable production costs are $9,875 per RDS. What isthe annual operating cash flow (OCF) from this project?
e.DEI’s comptroller is primarily interested in the impact of DEI’sinvestments on the bottom line of reported accounting statements.What will you tell her is the accounting break-even quantity ofRDSs sold for this project?
Finally, DEI’s president wants you to throw all your calculations,assumptions, and everything else into the report for the chieffinancial officer; all he wants to know is what the RDS project’sinternal rate of return (IRR) and net present value (NPV) are. (Donot round intermediate calculations. Enter your NPV in dollars, notmillions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89. Enter your IRR as a percent rounded to 2 decimalplaces, 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