Suppose you have been hired as a financial consultant to Defense Electronics, In

Question

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 $5.2 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 $6 million. In five years, the aftertax value of the land will be $6.4 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 $32.56 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 $5.2 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 $6 million. In five years, the aftertax value of the land will be $6.4 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 $32.56 million to build. The following market data on DEI

Explanation / Answer

step1:
calculate depriciation per year

assuming straight line depriciation

depriciation pr year = 32,560,000 / 5 = 6,512,000

step2:
calculate earnings before income and tax(EBIT)

sales = 20500 * 11150 = 228,575,000

fixed costs = 7.500,000

variable costs = 20500 * 9750 = 199,875,000

EBIT = sales - variable costs - fixed costs

= 21,200,000

step3:

calculate operating cash flow (OCF)

OCF = (EBIT - depriciation) * (1-tax rate) + depriciation

= (21200000 - 6,512,000) *(1-38%) + 6,512,000

= $15,618,560.....................ans

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