Suppose you have beenhired as a financial consultant to Defense Electronics, Inc. (DEI),a large, publicly traded firm that is the market share leader inradar detection systems (RDSs). The company is looking at settingup a manufacturing plant overseas to produce a new line of RDSs.This will be a five-year project. The company bought some landthree years ago for $4.8 million in anticipation of using it as atoxic dump site for waste chemicals, but it built a piping systemto safely discard the chemicals instead. The land was appraisedlast week for $5.6 million. In five years, the aftertax value ofthe land will be $6 million, but the company expects to keep theland for a future project. The company wants to build its newmanufacturing plant on this land; the plant and equipment will cost$32.24 million to build. The following market data on DEI’ssecurities is current:

Debt:	233,000 7.2percent coupon bonds outstanding, 25 years to maturity, selling for108 percent of par; the bonds have a $1,000 par value each and makesemiannual payments.
Commonstock:	9,100,000 sharesoutstanding, selling for $71.30 per share; the beta is 1.1.
Preferredstock:	453,000 sharesof 5 percent preferred stock outstanding, selling for $81.30 pershare and and having a par value of $100.
Market:	7 percentexpected market risk premium; 5 percent risk-free rate.

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEIspreads of 8 percent on new common stock issues, 6 percent on newpreferred stock issues, and 4 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 35 percent. The projectrequires $1,375,000 in initial net working capital investment toget operational. Assume Wharton raises all equity for new projectsexternally.

a. Calculate the project’s initial Time 0 cashflow, taking into account all side effects. Assume that the networking capital will not require flotation costs. (Anegative answer should be indicated by a minus sign.Do not round intermediate calculations. Enter your answerin dollars, not millions of dollars, e.g.,1,234,567.)

Cash flow          $

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 +2 percent to account for this increased riskiness.Calculate the appropriate discount rate to use when evaluatingDEI’s project. (Do not round intermediate calculations.Enter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)

Discount rate           %

c. The manufacturing plant has an eight-year taxlife, and DEI uses straight-line depreciation. At the end of theproject (that is, the end of Year 5), the plant and equipment canbe scrapped for $4.8 million. What is the aftertax salvage value ofthis plant and equipment? (Do not round intermediatecalculations. Enter your answer in dollars, not millions ofdollars, e.g., 1,234,567.)

Aftertax salvage value          $

d. The company will incur $7,100,000 in annualfixed costs. The plan is to manufacture 18,500 RDSs per year andsell them at $10,950 per machine; the variable production costs are$9,550 per RDS. What is the annual operating cash flow (OCF) fromthis project? (Do not round intermediate calculations.Enter your answer in dollars, not millions of dollars, e.g.,1,234,567.)

Operating cash flow          $

e. DEI’s comptroller is primarily interested inthe impact of DEI’s investments on the bottom line of reportedaccounting statements. What will you tell her is the accountingbreak-even quantity of RDSs sold for this project? (Do notround intermediate calculations and round your answer to thenearest whole number, e.g., 32.)

Break-even quantity           units

f. Finally, DEI’s president wants you to throw allyour calculations, assumptions, and everything else into the reportfor the chief financial officer; all he wants to know is what theRDS project’s internal rate of return (IRR) and net present value(NPV) are. Assume that the net working capital will not requireflotation costs. (Enter your NPV answer in dollars, notmillions of dollars, e.g., 1,234,567. Enter your IRR answer as apercent. Do not round intermediate calculations and round youranswers to 2 decimal places, e.g., 32.16.)

IRR	%
NPV	$