You were 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 create a new line of RDSs. This will be a 5-year project. The company bought some land 3 years ago for $6 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. The land was appraised last week for $ 1.30 million. The company wants to build its new manufacturing plant on this land; the plant will cost $6.5 million to build. The subsequent market data on DEI's securities are current.

Debt 10,000 7-percent coupon bonds outstanding, 15 years to maturity, selling for 92 % of par; the bonds have a $1,000 par value each and make semiannual payments.

Common Stock 250,000 shares outstanding, selling for $55 per share; the beta is 1.4.

Preferred Stock 10,000 shares of 6% preferred stock outstanding, selling for $85 per share

Market 7 % expected market risk premium; 5 percent risk-free rate.

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 14 percent on new common stock issues, 9 % on new preferred stock issues and 5 % on new debt issues. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI's tax rate is 34 %. The project requires $750,000 in initial net working capital investment to get operational.

a) Compute the project's initial Time 0 cash flow.

b) Compute the appropriate discount rate to use when evaluating DEI's project

c) The manufacturing plant has an eight-year tax life. At end of the project (i.e. the end of Year 5), the plant can be scrapped for $2 million. Find the after-tax salvage value of this manufacturing plant?

d) The company will incur $200,000 in annual fixed costs. The plan is to manufacture 10,000 RDSs per year and selling them at $10,000 per machine; the variable production costs are $8,000 per RDS. Find the annual operating cash flow from this project?

e) Find the accounting break-even quantity of RDSs sold for this project?

f) Evaluate the project's internal rate of return and net present value?