Your company is looking at setting up a manufacturing plantoverseas to manufacture driverless flying cars. The company boughtsome land in that that was just appraised for $3.8 million aftertax. The proposed project will last five years. It is expected thatyou can sell the land at the end of 5 years for $4.1 million. Themanufacturing plant will cost $34 million to build.

The following market data on your company are current. Debt:195,000 bonds with a coupon rate of 6.2 percent outstanding, 25years to maturity, selling for 106 percent of par; the bonds makesemiannual payments.

Common Stock: 8,100,000 shares outstanding, selling for $63 pershare; the beta is 1.1. 7 percent expected market risk premium and3.1 percent risk free rate.

Your underwriter tells you the floatation costs for commonstock, preferred stock, and debt are 7%, 5%, and 3% respectively.The corporate tax rate is 21%. The project requires $1.5 million ininitial net working capital which will no longer be required at theend of the project.

a) This project is riskier than the typical project that yourcompany normally undertakes. You have been told to adjust the riskfactor by +2 percent. Calculate the appropriate discount rate touse when evaluating this project.

b) Calculate the average cost of floatation.

c) The manufacturing plant uses straight line depreciation tozero for the life of the project. At the end of the project (thatis at the end of 5 years) the plant and equipment can be scrappedfor $4.9 million. What is the after tax salvage value of this plantand equipment?

d) The company will incur $6.9 million in annual fixed costs.The plan is to manufacture 121 driverless flying cars per year andsell them for $1,145,000 each; the variable costs are $950,000 perunit. What is the annual operating cash flow (OCF) per year for theproject?

e) What is the IRR and NPV of this project?