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 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 $7.65 million after taxes. In five years, the land will be worth $7.95 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build. The following market data on DEI's securities are current: Debt: 45,500 6.8 percent coupon bonds outstanding, 20 years to maturity, selling for 94.5 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 755,000 shares outstanding, selling for $94.50 per share the beta is 1.25. Preferred stock: 35,500 shares of 6.2 percent preferred stock outstanding, selling for $92.50 per share. Market: 7 percent expected market risk premium; 5.2 percent risk-free rate. DEI's tax rate is 35 percent. The project requires $850,000 in initial networking capital investment to get operational. a. Calculate the project's Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Time 0 cash flow 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 +1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI's project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $1.55 million. What is the aftertax salvage value of this manufacturing plant? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Aftertax salvage value S The company will incur $2,350,000 in annual fixed costs. The plan is to manufacture 13,500 RDSs per year and sell them at $10,900 per machine; the variable production costs are $10,100 per RDS. What is the annual operating cash flow, OCF, from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Operating cash flow Calculate the project's net present value. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value $ Calculate the project's internal rate of return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Internal rate of return

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 $7.2 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. If the land were sold today, the net proceeds would be $7.73 million after taxes. In five years, the land will be worth $8.03 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.52 million to build. The following market data on DEI’s securities are current: Debt: 92,600 7.1 percent coupon bonds outstanding, 25 years to maturity, selling for 93.7 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 1,740,000 shares outstanding, selling for $95.30 per share; the beta is 1.16. Preferred stock: 82,000 shares of 6.35 percent preferred stock outstanding, selling for $93.30 per share. Market: 6.8 percent expected market risk premium; 5.15 percent risk-free rate. DEI’s tax rate is 23 percent. The project requires $890,000 in initial net working capital investment to get operational.

a. Calculate the project’s Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

b. 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 +1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $1.63 million. What is the aftertax salvage value of this manufacturing plant? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

d. The company will incur $2,430,000 in annual fixed costs. The plan is to manufacture 14,300 RDSs per year and sell them at $11,700 per machine; the variable production costs are $10,900 per RDS. What is the annual operating cash flow, OCF, from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

e. Calculate the project's net present value. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) f. Calculate the project's internal rate of return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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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 $7.3 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 $7.77 million after taxes. In five years, the land will be worth $8.07 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.68 million to build. The following market data on DEI’s securities are current:

Debt: 93,400 7 percent coupon bonds outstanding, 24 years to maturity, selling for 93.3 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

Common stock: 1,820,000 shares outstanding, selling for $95.70 per share; the beta is 1.12.

Preferred stock: 86,000 shares of 6.3 percent preferred stock outstanding, selling for $93.70 per share.

Market: 7.05 percent expected market risk premium; 4.95 percent risk-free rate.

DEI’s tax rate is 22 percent. The project requires $910,000 in initial net working capital investment to get operational.

a. Calculate the project’s Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

b. 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. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $1.67 million. What is the aftertax salvage value of this manufacturing plant? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

d. The company will incur $2,470,000 in annual fixed costs. The plan is to manufacture 14,700 RDSs per year and sell them at $12,100 per machine; the variable production costs are $11,300 per RDS. What is the annual operating cash flow, OCF, from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

e. Calculate the project's net present value. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

f. Calculate the project's internal rate of return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

You have been hired as a financial advisor/consultant in the Financial Department of Defenders 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 overseas three years ago for $7 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.

This land was appraised last week for $9.6 million. The company wants to build its new manufacturing plant on this land; the plant will cost $15 million to build. The following market data on DEI's securities are current:

Debt:

• 15,000 bonds outstanding

• coupon rate: 7% of face value

• 15 years to maturity

• selling for 92% of par

• the bonds have a $1,000 par value each

• make semiannual payments.

Common stock:

• 300,000 shares outstanding

• selling for $75 per share

• the beta is 1.3

Preferred stock:

• 20,000 shares outstanding

• dividend of 5 percent of current market

• selling for $72 per share

Market:

• 8% market risk premium

• 2% risk-free rate

Assume that DEI’s target debt-to-equity ratio is the same as its current actual debt-to-equity ratio. DEI uses G. M. Wharton as its lead underwriter. Wharton charges DEI spreads of 9% on new common stock issues, 7% on new preferred stock issues, and 4% on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock.

DEI's corporate tax rate is 35%.

The project requires $900,000 in initial net working capital investment to get operational.

The manufacturing plant has an eight-year tax life, and as a Class 43 asset, has an assigned CCA rate of 30%.

During the life of the project, the company will incur $400,000 in annual fixed costs. The plan is to manufacture 12,000 RDSs per year and sell them at $10,000 per machine. The variable production costs are $9,000 per RDS.

The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Your boss—the CFO—has told you to use an adjustment factor of +2% to account for this increased riskiness.

DEI's CFO tells you to put all your calculations, assumptions, and everything else into a report that she will present to the President. She tells you to be sure to include:

a) The appropriate discount rate to use when evaluating this project, showing how you arrived at that number.

b) The project’s initial Time 0 cash flow, considering all side effects, showing how you arrived at that number.

c) The annual Operating Cash Flows for this project, again showing how you arrived at that number.

d) The project's IRR, NPV and payback, showing how you arrived at those numbers as well.

She wants the report to include a recommendation on whether DEI should go ahead with this project and an explanation of why. She also reminds you to make any assumptions you’re making explicit

a. Time 0 cash flow:
b. Discount rate %:
c. Aftertax salvage value:
d. Operating cash flow:
e. NPV:
f: IRR %:

Problem 7-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income [LO7-1, LO7-2, LO7-3]

High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:

Management is anxious to assess the profitability of the new camp cot during the month of May.

Required:

1. Assume that the company uses absorption costing.

a. Determine the unit product cost.

b. Prepare an income statement for May.

2. Assume that the company uses variable costing.

a. Determine the unit product cost.

b. Prepare a contribution format income statement for May.