You are the financial manager for a company in defense industry. The firm is planning on establishing a plant overseas to produce a new line of products. The project will last for 5 years. The company bought land 6 years ago for 4 million dollars. The fair market value of the land today is 5.1 million dollars. The after tax value of the land after 5 years is $6 million, but the company is not planning to sell then.

They will keep it for a future project. The cost of the plant and equipment is $35 million.

Currently, the firm has the following securities:

1. Debt: 240,000 bonds with 7.5% coupon rate outstanding, 20 years maturity, sold at 94% of par, the par value is $1,000 and make semiannual payments.

2. Common Stocks: 9,000,000 stocks, selling for $71/stock, with beta 1.2

3. Preferred stocks: 400,000 stocks at 5.5% and currently selling for $81

The market risk premium is 8% and 5% is the risk-free rate. Tax rate is 35% and the project requires $1,300,000 of initial net working capital.

a. Calculate the project initial cash flow CF0

b. The new project is somewhat riskier than a typical project for the firm, since it is overseas. So you are going to use a +3 adjustment factor to account for this increase risk. Calculate the appropriate discount rate that the firm should use when evaluating the project.

c. The firm will incur $7 million in fixed cost annually. They will produce 18,000 unites annually and sell each for $10,900. The variable cost is 9,400/unit. What is the annual OCF from this project?

d. What is the project NPV and IRR?