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 $3.9 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 $4.4 million on an after-tax basis. In five years, the after-tax value of the land will be $4.8 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 $37 million to build. The following market data on DEI’s securities are current: Debt: 210,000 6.4 percent coupon bonds outstanding, 25 years to maturity, selling for 110 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 8,300,000 shares outstanding, selling for $68 per share; the beta is 1.3. Preferred stock:450,000 shares of 4.5 percent preferred stock outstanding, selling for $79 per share. Market: 6 percent expected market risk premium; 3.5 percent risk-free rate. DEI uses HSOB as its lead underwriter. Wharton charges DEI spreads of 10 percent on new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. HSOB has included all direct and indirect issuance costs (along with its profit) in setting these spreads. HSOB 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 32 percent. The project requires $1,300,000 in initial net working capital investment to get operational. Assume DEI raises all equity for new projects externally. Calculate the project’s initial Time 0 cash flow, taking into account all side effects. (This includes an adjustment for the flotation costs described in the above paragraph.The total costs will be the opportunity cost of the land, the cost of the building and the cost of the working capital.The cost of the building and working capital will require new financing and therefore finance costs.Thus the building and working capital must be adjusted for the flotation costs as discussed in section 14-7 of the 11th edition and 14-6 of the 10th edition of the text.It is not necessary to adjust the land costs since we already own the land.) 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 +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $5.1 million. What is the after-tax salvage value of this plant and equipment? The company will incur $6,700,000 in annual fixed costs. The plan is to manufacture 15,300 RDSs per year and sell them at $11,450 per machine; the variable production costs are $9,500 per RDS. What is the annual operating cash flow (OCF) from this project? Remember in year 5 that besides the cash flows from operation, you also get the salvage, tax benefit, land and the working capital back. Note that while the WC outlay includes the financing costs, the amount back in time 5 will only be the WC amount. So the outlay for WC is 1,300,000 plus financing costs, but you only recover the $1,300,000 since the financing costs have been paid out to your underwriter. Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. What will you report? 1. The cost of common stock is: (enter decimal answer to 4 decimals) 2. The market value of preferred stock in dollars is: (enter answer without commas, $ sign and NO decimals) 3. The weight or proportion of debt is: (enter as a decimal to 4 places) 4. The weighted average cost of capital without the 2% adjustment is: (enter as a decimal to 4 places) 5. The total financing cost (total cost - original cost) for the just the plant is: Enter the data without commas, $ signs or decimals) 6. The net cash flow for periods 1 to 4 is: (Enter the data without commas, $ signs or decimals) 7. The total outlay in Time 0 including flotation costs is: (Enter the data without commas, $ signs or decimals) 8. Using your final WACC what is the NPV of the project? (Enter the data without commas, $ signs or decimals) I need answers to 1-8 to verify I did the work correctly.

Case: Titan Electric Company

The Titan Electric Company (TEC) manufactures and distributes electronic transformers used to distribute electric power throughout the US. The company started with a small manufacturing plant in Reno and gradually built a customer base throughout the Southwest. A distribution center was established in Denver, and later, as business expanded, their second and third distribution centers were established in Tucson and Sacramento. To date, the company operates two plants, three distribution centers and nine warehouse locations. Manufacturing costs differ between the company’s production plants. The cost of each transformer produced at the Reno plant is $1200. The newer Las Vegas plant utilizes more efficient equipment; as a result, manufacturing costs $1050 per transformer.

The cost of shipping a transformer from each of the two plants to each of the three distribution centers is shown in Table 1, below. Note that due to lack of Interstate highways, no shipments are allowed from Reno plant to the Tucson distribution center. The annual production capacity is 30,000 transformers at the Reno plant and 20,000 at the Las Vegas plant.

The company serves their nine warehouses from the three distribution centers. The forecast of the number of meters needed in each warehouse for the next quarter is shown in Table 2, below.

The cost per unit of shipping from each distribution center to each warehouse is given in Table 3, below. Note that some distribution centers cannot serve certain warehouses. These are indicated by a dash, “—”. Titan is interested in developing manufacturing plans for its plants, and shipping plans for its distribution centers that result in the lowest overall costs.

Assignment Questions

1. With the current supply chain design, how many transformers are produced at each plant and how many are shipped from each distribution center?
   
2. What is Titan’s total manufacturing costs for the year? What is Titan’s total distribution costs for the year?
   
3. How much could Titan save if they could produce more transformers at the Las Vegas plant? How many more transformers could they produce and ensure that the same set of binding constraints remain binding?
   
4. Which warehouse is the most expensive to stock one additional transformer?
   
5. Over the next five years, Titan is anticipating moderate growth in demand of 5000 transformers. Would you recommend that Titan consider plant expansion at this time? If so, at which plant and why?
   

6.Titan is considering a proposal to ship up to 2000 transformers directly from its Las Vegas plant to the Salt Lake City warehouse. The cost of shipping directly is estimated to be $50 per transformer, with no change in manufacturing costs. Under this new plan, what are the new manufacturing and shipping plans? How much would Titan save?

If there is an increase in the popularity of laptops and the cost of making laptop becomes cheaper also for the sellers, then what will happen to the New Equilibrium price and quantity sold (using Supply and Demand curve):

what are implicit and explicit cost for an airline industry?

Why is marginal cost curve upward sloping?

Is cost accounting necessary to properly manage a company?