Only need E: Net present value. All entered amounts are correct Suppose you have
ID: 2617896 • Letter: O
Question
Only need E: Net present value. All entered amounts are correct Suppose you have been hired as a inancial consultant to Delense Electronics, Inc. (DE), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at seting up a manufacturing plant overseas to produce a new ine of RDSs. This will be a five year project The company bought some land three years ago for $7 million in andcipation of using it as a toxic dump s ke waste chemicals, but bult a piprg system to safely dscard the chemicals instead-the land were seld today, he net proceed, would be SS4 malon ahr uees be years te lend te milion afer taxes. The company wants to build its new manuflacturing plant on this land, the plant wil cost $13.16 million to build. The following market data on DEI's securities are curment 5,400 72 peroent coupon bonds outstanding 18 years to maturity, seling for 94 8 percent of par, the bonds have a $1,000 par value each and make semiannual payments Debt Common stock 754,000 shares oustanding, seling for 594 40 per shae, the bela is 1.24 Preferred sock: 35,400 shares of 6.4 pencent prelerred stock outslanding selling for $02 40 per share Market DErs tax rate is 40 percent. The project requires $845,000 in initial net working capital investment to get operational 2 pencent expecied market risk premium; 54 percent rsk-tree aeExplanation / Answer
Initial cash outflow
cost of plant
-13160000
investment in working capital
-845000
Initial cash outflow
-14005000
Annual cash flow
sales
144720000
v.cost
134000000
less fixed cost
2340000
less depreciation
13160000/8
1645000
operating profit
6735000
less taxes -40%
2694000
after tax profit
4041000
add depreciation
1645000
operating income
5686000
Year
net operating cash flow
present value of cash flow = operating cash flow/(1+r)^n r= 13.58%
0
-21645000
-21645000
1
5686000
5006163.1
2
5686000
4407609.7
3
5686000
3880621.3
4
5686000
3416641.4
5
17369000
9188941.6
net present value =sum of present value of operating cash flow
4254977
IRR =using irr function in ms excel
20.10%
Initial cash outflow
cost of plant
-13160000
investment in working capital
-845000
Initial cash outflow
-14005000
Annual cash flow
sales
144720000
v.cost
134000000
less fixed cost
2340000
less depreciation
13160000/8
1645000
operating profit
6735000
less taxes -40%
2694000
after tax profit
4041000
add depreciation
1645000
operating income
5686000
Year
net operating cash flow
present value of cash flow = operating cash flow/(1+r)^n r= 13.58%
0
-21645000
-21645000
1
5686000
5006163.1
2
5686000
4407609.7
3
5686000
3880621.3
4
5686000
3416641.4
5
17369000
9188941.6
net present value =sum of present value of operating cash flow
4254977
IRR =using irr function in ms excel
20.10%
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