Could really use the help with steps, please. I\'m struggling to answer this que
ID: 2646432 • Letter: C
Question
Could really use the help with steps, please. I'm struggling to answer this question with Excel!
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 $4.2 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 $5.0 million. In five years, the aftertax value of the land will be $5.4 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $31.76 million to build. The following market data on DEI
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 $4.2 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 $5.0 million. In five years, the aftertax value of the land will be $5.4 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $31.76 million to build. The following market data on DEI
Explanation / Answer
The $4.2 million cost of the land 3 years ago is a sunk cost and irrelevant; the $.0M appraised value
of the land is an opportunity cost and is relevant. The relevant market value capitalization weights are:
MVD = 227000($1,000)(1.09) = $247.43M; MVE = 8500000($70.70) = $600.95M
MVP = 447000($80.7) = $36.07M; V = $247.43M + 600.95M + 36.07M = $884.45M
RE = .06 + 1.2(.08) = 15.6%
P0 = $1090 = $37(PVIFAR%,50) + $1,000(PVIFR%,50); R = 3.32%, YTM = 6.64%
RD = (1