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 $4.5 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 $5.3 million. In five years, the aftertax value of the land will be $5.7 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 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 $4.5 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 $5.3 million. In five years, the aftertax value of the land will be $5.7 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 million to build. The following market data on DEI

Explanation / Answer

please go through that

a Equipment 32 Net working Capital 1.3 Total Initial outlay $      33.30 Million b As all funding will be from common stock therefore the cost of capital will be = Risk free rate of return + beta risk prmium .05+1.1*.07= 0.127 add for risk 0.02 Discount factor to be used 14.70% rounded to 15% c Each year Depreciation 4 Depreciation for 5 years 20 Book value at 5 year 12 less Salvage value 4.5 Loss on sale of Plant 7.5 Tax saving 2.625 The tax will be adjusted against tax on other profit of the firm. After tax salvage value $      7.125 million d Sales 183600000 less variable cost 159800000 less fixed cost 6800000 depreciation is included Operating profit 17000000 less taxes 5950000 Profit after taxes 11050000 add depreciation 4000000 Operating cash flow 15050000 or $      15.05 million e CM per unit 1400 Break even Qty 4857 RDS f Year Cashflow PVIF PV 0 $    (33.30) 1 -33.3 1 $      15.05 0.869565 13.08696 2 $      15.05 0.756144 11.37996 3 $      15.05 0.657516 9.895619 4 $      15.05 0.571753 8.604886 5 $      23.48 0.497177 11.67122 NPV $    21.34 Milion IRR 38.12%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.