Problem 12-25 Project Evaluation [LO 3] Suppose you have been hired as a financi
ID: 2699003 • Letter: P
Question
Problem 12-25 Project Evaluation [LO 3]
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 $7.00 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 $7.64 million after taxes. In five years, the land will be worth $7.94 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.16 million to build. The following market data on DEI%u2019s securities are current:
45,400 7.2 percent coupon bonds outstanding, 18 years to maturity, selling for 94.6 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
DEI%u2019s tax rate is 40 percent. The project requires $845,000 in initial net working capital investment to get operational.
Calculate the project%u2019s Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (Do not include the dollar sign ($). 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%u2019s project.(Do not include the percent sign (%). Round your answer 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 $7.00 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 $7.64 million after taxes. In five years, the land will be worth $7.94 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.16 million to build. The following market data on DEI%u2019s securities are current:
Explanation / Answer
ANSWER
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