Suppose you have been hired as a financial consultant to Defense Electronics, In
ID: 2713512 • Letter: S
Question
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 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 $7.73 million after taxes. In five years, the land will be worth $8.03 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.52 million to build. The following market data on DEI’s securities are current:
46,300 7.1 percent coupon bonds outstanding, 19 years to maturity, selling for 93.7 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
DEI’s tax rate is 38 percent. The project requires $890,000 in initial net working capital investment to get operational.
Calculate the project’s Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
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’s project. (Do not round intermediate calculations. Enter your answer as a percentage rounded 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 $1.63 million. What is the aftertax salvage value of this manufacturing plant? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
The company will incur $2,430,000 in annual fixed costs. The plan is to manufacture 14,300 RDSs per year and sell them at $11,700 per machine; the variable production costs are $10,900 per RDS. What is the annual operating cash flow, OCF, from this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Calculate the net present value. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Calculate the internal rate of return. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
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 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 $7.73 million after taxes. In five years, the land will be worth $8.03 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.52 million to build. The following market data on DEI’s securities are current:
Explanation / Answer
Requirement-1:
Thus, Initial Time 0 Cash Flow is $ 14,410,000
Requirement-2
Cost of Common Stoc:
Using CAPM Model,
Ke= Rf+Beta(Rm-Rf)
= 5.35+1.16(7.15)
= 13.64%
Cost of Capital 11.1 %
Add: Adjustment Factor 3 %
Adjsuted Discount Rate 14.1 %
Thus Discount rate is 14.1%
Requirement-3:
Thus, After TAx Salvage Value is 2,937,200.
Requirement-4:
Thus, Annual Operating Cash Flow is 5,586,200.
Requirement-5:
(a)
Thus, Net Present Value is $ 10,392,978.
(b)NPV @ 14.1%
Initial Investment =14,410,000
Net Pesent Value of Cash Inflow =24,802,978
Net Present Value from The Project =10,392,978
NPV @ 20%
Initial Investment =14,410,000
Net Pesent Value of Cash =14,265,368
Net Present Value =(-) 144,632
Thus Internal rate of Return is Approximate 20%
Particulars Amount($) Initial Cost of Project 13,520,000 Initial Net Working Capital 890,000 Total Initail cost 14,410,000Related Questions
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