Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that isthe market share leader in radar detection systems (RDSS). The company is looking at setting up a manufacturing plant overseas toproduce a new line of RDSS. This will be a five-year project. The company bought some land three years ago for $7.2 million inanticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. Ifthe land were sold today, the net proceeds would be $7.65 million after taxes. In five years, the land will be worth $7.95 million aftertaxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build. The followingmarket data on DEI's securities are current:Debt:Common stock:Preferred stock:Market:91,000 6.8 percent coupon bonds outstanding, 27 years to maturity,selling for 94.5 percent of par; the bonds have a $1,000 par value eachand make semiannual payments.1,580,000 shares outstanding, selling for $94.50 per share; the beta is1.25.74,000 shares of 6.2 percent preferred stock outstanding, selling for$92.50 per share.6.8 percent expected market risk premium; 5.1 percent risk-free rate.DEI's tax rate is 25 percent. The project requires $850,000 in initial net working capital Investment to get operational.a. Calculate the project's Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not requirefloatation costs.Note: A negative answer should be indicated by a minus sign. Do not round Intermediate calculations and enter your answer indollars, not millions of dollars, e.g., 1,234,567.b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas.Management has told you to use an adjustment factor of +2 percent to account for this Increased riskiness. Calculate theappropriate discount rate to use when evaluating DEI's project.Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (I.e., the end ofYear 5), the plant can be scrapped for $1.55 million. What is the aftertax salvage value of this manufacturing plant?Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.d. The company will incur $2,350,000 in annual fixed costs. The plan is to manufacture 13,500 RDSS per year and sell them at $10,900per machine; the variable production costs are $10,100 per RDS. What Is the annual operating cash flow, OCF, from this project?Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.e. Calculate the project's net present value.Note: Do not round Intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89f. Calculate the project's internal rate of return.Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.Answer is not complete.a. Time 0 cash flowS-21,700,000b. Discount rate%c. Aftertax salvage valueS2,400,000d. Operating cash flowS6,750,000e. NPVf. IRR25.24%

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Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSS). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSS. This will be a five-year project. The company bought some land three years ago for $7.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $7.65 million after taxes. In five years, the land will be worth $7.95 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build. The following market data on DEI's securities are current: Debt: Common stock: Preferred stock: Market: 91,800 6.8 percent coupon bonds outstanding, 27 years to maturity, selling for 94.5 percent of par; the bonds have a $1,000 par value each and make semiannual payments. 1,580,000 shares outstanding, selling for $94.50 per share; the beta is 1.25. 74,000 shares of 6.2 percent preferred stock outstanding, selling for $92.50 per share. 6.8 percent expected market risk premium; 5.1 percent risk-free rate. DEI's tax rate is 25 percent. The project requires $850,000 in initial net working capital Investment to get operational. a. Calculate the project's Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS