Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...

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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 $4.4 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 $5.2 million. In five years, theaftertax value of the land will be $5.6 million, but the companyexpects to keep the land for a future project. The company wants tobuild its new manufacturing plant on this land; the plant andequipment will cost $31.92 million to build. The following marketdata on DEI’s securities is current:

  Debt:
114,000 7 percent coupon bonds outstanding, 26 years tomaturity, selling for 107 percent of par; the bonds have a parvalue of $2,000 and make semiannual payments.
  Common stock:
8,700,000 shares outstanding, selling for $70.90 per share; thebeta is 1.3.
  Preferred stock:
449,000 shares of 5.3 percent preferred stock outstanding,selling for $80.90 per share and having a par value of $100.
Market:
6 percent expected market risk premium; 4.2 percent risk-freerate.
DEI uses G.M. Wharton as its lead underwriter. Wharton chargesDEI spreads of 7 percent on new common stock issues, 6 percent onnew preferred stock issues, and 5 percent on new debt issues.Wharton has included all direct and indirect issuance costs (alongwith its profit) in setting these spreads. Wharton has recommendedto DEI that it raise the funds needed to build the plant by issuingnew shares of common stock. DEI’s tax rate is 21 percent. Theproject requires $1,275,000 in initial net working capitalinvestment to get operational. Assume Wharton raises all equity fornew projects externally.
a.
Calculate the project’s initial Year 0 cash flow, taking intoaccount all side effects. Assume that the net working capital willnot require flotation costs. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answer in dollars, not millions of dollars, roundedto the nearest whole dollar amount, e.g., 1,234,567.)
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 1 percent toaccount 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.)
c. The manufacturing plant has an eight-year tax life, and DEIuses straight-line depreciation. At the end of the project (thatis, the end of Year 5), the plant and equipment can be scrapped for$4.4 million. What is the aftertax salvage value of this plant andequipment? (Do not round intermediate calculations andenter your answer in dollars, not millions of dollars, rounded tothe nearest whole dollar amount, e.g., 1,234,567.)
d. The company will incur $6,700,000 in annual fixed costs. Theplan is to manufacture 16,500 RDSs per year and sell them at$10,750 per machine; the variable production costs are $9,350 perRDS. What is the annual operating cash flow (OCF) from thisproject? (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 comptroller is primarily interested in the impact ofDEI’s investments on the bottom line of reported accountingstatements. What will you tell her is the accounting break-evenquantity of RDSs sold for this project? (Do not roundintermediate calculations and round your answer to the nearestwhole number, e.g., 32.)
f. Finally, DEI’s president wants you to throw all yourcalculations, assumptions, and everything else into the report forthe chief financial officer; all he wants to know is what the RDSproject’s internal rate of return (IRR) and net present value (NPV)are. (Do not round intermediate calculations. Enter yourNPV answer in dollars, not millions of dollars, rounded to 2decimal places, e.g., 1,234,567.89. Enter your IRR answer as apercent rounded to 2 decimal places, e.g., 32.16.)

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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 $4.4 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 $5.2 million. In five years, theaftertax value of the land will be $5.6 million, but the companyexpects to keep the land for a future project. The company wants tobuild its new manufacturing plant on this land; the plant andequipment will cost $31.92 million to build. The following marketdata on DEI’s securities is current: Debt:114,000 7 percent coupon bonds outstanding, 26 years tomaturity, selling for 107 percent of par; the bonds have a parvalue of $2,000 and make semiannual payments. Common stock:8,700,000 shares outstanding, selling for $70.90 per share; thebeta is 1.3. Preferred stock:449,000 shares of 5.3 percent preferred stock outstanding,selling for $80.90 per share and having a par value of $100.Market:6 percent expected market risk premium; 4.2 percent risk-freerate.DEI uses G.M. Wharton as its lead underwriter. Wharton chargesDEI spreads of 7 percent on new common stock issues, 6 percent onnew preferred stock issues, and 5 percent on new debt issues.Wharton has included all direct and indirect issuance costs (alongwith its profit) in setting these spreads. Wharton has recommendedto DEI that it raise the funds needed to build the plant by issuingnew shares of common stock. DEI’s tax rate is 21 percent. Theproject requires $1,275,000 in initial net working capitalinvestment to get operational. Assume Wharton raises all equity fornew projects externally.a.Calculate the project’s initial Year 0 cash flow, taking intoaccount all side effects. Assume that the net working capital willnot require flotation costs. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answer in dollars, not millions of dollars, roundedto the nearest whole dollar amount, e.g., 1,234,567.)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 1 percent toaccount 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.)c.The manufacturing plant has an eight-year tax life, and DEIuses straight-line depreciation. At the end of the project (thatis, the end of Year 5), the plant and equipment can be scrapped for$4.4 million. What is the aftertax salvage value of this plant andequipment? (Do not round intermediate calculations andenter your answer in dollars, not millions of dollars, rounded tothe nearest whole dollar amount, e.g., 1,234,567.)d.The company will incur $6,700,000 in annual fixed costs. Theplan is to manufacture 16,500 RDSs per year and sell them at$10,750 per machine; the variable production costs are $9,350 perRDS. What is the annual operating cash flow (OCF) from thisproject? (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 comptroller is primarily interested in the impact ofDEI’s investments on the bottom line of reported accountingstatements. What will you tell her is the accounting break-evenquantity of RDSs sold for this project? (Do not roundintermediate calculations and round your answer to the nearestwhole number, e.g., 32.)f.Finally, DEI’s president wants you to throw all yourcalculations, assumptions, and everything else into the report forthe chief financial officer; all he wants to know is what the RDSproject’s internal rate of return (IRR) and net present value (NPV)are. (Do not round intermediate calculations. Enter yourNPV answer in dollars, not millions of dollars, rounded to 2decimal places, e.g., 1,234,567.89. Enter your IRR answer as apercent rounded to 2 decimal places, e.g., 32.16.)

Debt:	114,000 7 percent coupon bonds outstanding, 26 years tomaturity, selling for 107 percent of par; the bonds have a parvalue of $2,000 and make semiannual payments.

Common stock:	8,700,000 shares outstanding, selling for $70.90 per share; thebeta is 1.3.

Preferred stock:	449,000 shares of 5.3 percent preferred stock outstanding,selling for $80.90 per share and having a par value of $100.

Market:	6 percent expected market risk premium; 4.2 percent risk-freerate.

a.	Calculate the project’s initial Year 0 cash flow, taking intoaccount all side effects. Assume that the net working capital willnot require flotation costs. (A negative answer should beindicated by a minus sign. Do not round intermediate calculationsand enter your answer in dollars, not millions of dollars, roundedto the nearest whole dollar amount, e.g., 1,234,567.)
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 1 percent toaccount 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.)
c.	The manufacturing plant has an eight-year tax life, and DEIuses straight-line depreciation. At the end of the project (thatis, the end of Year 5), the plant and equipment can be scrapped for$4.4 million. What is the aftertax salvage value of this plant andequipment? (Do not round intermediate calculations andenter your answer in dollars, not millions of dollars, rounded tothe nearest whole dollar amount, e.g., 1,234,567.)
d.	The company will incur $6,700,000 in annual fixed costs. Theplan is to manufacture 16,500 RDSs per year and sell them at$10,750 per machine; the variable production costs are $9,350 perRDS. What is the annual operating cash flow (OCF) from thisproject? (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 comptroller is primarily interested in the impact ofDEI’s investments on the bottom line of reported accountingstatements. What will you tell her is the accounting break-evenquantity of RDSs sold for this project? (Do not roundintermediate calculations and round your answer to the nearestwhole number, e.g., 32.)
f.	Finally, DEI’s president wants you to throw all yourcalculations, assumptions, and everything else into the report forthe chief financial officer; all he wants to know is what the RDSproject’s internal rate of return (IRR) and net present value (NPV)are. (Do not round intermediate calculations. Enter yourNPV answer in dollars, not millions of dollars, rounded to 2decimal places, e.g., 1,234,567.89. Enter your IRR answer as apercent rounded to 2 decimal places, e.g., 32.16.)