Problem 12-25 Project Evaluation [LO 3]

Suppose you have been hired as a financial consultant to Defense Electronics Inc. (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 $7.00 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 $7.64 million after taxes. In five years the land will be worth $7.94 million after taxes. The company wants to
build its new manufacturing plant on this land; the plant will cost $13.16 million to build. The following market data on DEI%u2019s
securities are current:

45400 7.2 percent coupon bonds outstanding 18 years to maturity selling for 94.6 percent of par; the bonds have a $1000 par value each
and make semiannual payments.

DEI%u2019s tax rate is 40 percent. The project requires $845000 in initial net working capital investment to get operational.

Calculate the project%u2019s Time 0 cash flow taking into account all side effects. Assume that any NWC raised does not require floatation
costs. (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Enter
your answer in dollars not millions of dollars (e.g. 1234567).)

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 +3 percent to account for this increased riskiness. Calculate the appropriate discount rate to
use when evaluating DEI%u2019s project.(Do not include the percent sign (%). Round your answer to 2
decimal places (e.g. 32.16).)

The manufacturing plant has an eight-year tax life and DEI uses straightline depreciation. At the end of the project (i.e. the end of
year 5) the plant can be scrapped for $1.54 million. What is the aftertax salvage value of this manufacturing plant? (Do not include the dollar sign ($). Enter your answer in dollars not
millions of dollars (e.g. 1234567).)

The company will incur $2340000 in annual fixed costs. The plan is to manufacture 13400 RDSs per year and sell them at $10800 per
machine; the variable production costs are $10000 per RDS. What is the annual operating cash flow OCF from this project? (Do not include the dollar sign ($). Enter your answer in dollars not millions of dollars (e.g.
1234567).)

Calculate the net present value. (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g. 32.16).)

Calculate the internal rate of return. (Do not include the percent sign (%). Round your answer to 2
decimal places (e.g. 32.16).)