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Suppose you have been hired as a financial consultant to Gulf Industries, (GI). The company is looking at setting up manufacturing plant overseas to produce a new surface-cleaning machine. This will be a five-year project. The company bought some land three years ago for $8.5 million. The land was appraised last week for $7.1 million. In five years, the after -tax value of the land will be $7.4 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 $40 million to build. The following market data on GIs securities are current: Debt 260,000 6.8% coupon bonds outstanding, 25 years to maturity, selling for 103% of par; the bonds have a $1,000 par value each and make semi-annual payments. Common stock 9,500,000 shares outstanding selling for $67 per share; the beta 1.25. Preferred stock 450,000 shares of 5.25% preferred stock outstanding, selling for $84 per share and having a par value of $100. Market 7% expected market risk premium; 3.6%risk-free rate. GI uses George Washington Bank as its lead underwriter. GWB charges GI spreads of 6.5% on new common stock issues, 4.5% on new preferred stock issues, and 3% on new debt issues. GIs tax rate is 35%. The project requires $1,400,000 in initial net working capital to get operational. The manufacturing plant has a five-year tax life, and GI uses straight-line depreciation. At the end of the project (that is, the end of year 5), the plant and equipment can be scrapped for $15 million. Required: a) Calculate the projects initial time 0 cash flow, taking into account all side effects. b) The new surface-cleaning machine project is somewhat riskier than a typical project for GI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increases riskiness. Calculate the appropriate discount rate to use when evaluating GIs project. c) The company will incur $7,900,000 in annual fixed costs. The plan is to manufacture 18,000 surface-cleaning machines per year and sell them at $10,900 per machine; the variable production costs are $9,450 per machine. What is the annual operating cash flow (OCF)from this project? d) What are the NPV and IRR of the project? What will you report? _______________________________

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