Question

You need the excel spreadsheet provided that has raw data for Raytheon Company and the

Standard & Poors 500 Index.

Suppose you have been hired as a financial consultant to Raytheon Company (RTN), 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. You need to advise them whether to take the project or not.

Calculate the Payback Period, NPV, and IRR for the project and determine whether they should

take the project or not.

1. The company bought some land three years ago for $3.7 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. The land was appraised last week for $4.5 million.

2. In five years, the aftertax value of the land will be $4.9 million

3. The plant and equipment will cost $31.36 million to build.

4. The manufacturing plant has an eight-year tax life, and RTN uses straight-line

depreciation. At the end of the project, the plant and equipment can be scrapped for $3.7

million.

5. The project requires $1,100,000 in initial net working capital investment to get

operational.

6. The plan is to manufacture 13,000 RDSs per year and sell them at $10,400 per machine.

7. The company will incur $6,000,000 in annual fixed costs, and the variable production

costs are $9,000 per RDS.

8. RTN’s tax rate is 35 percent.

9. The following market data on RTN’s securities is current:

Debt:

222,000, 7.2 percent coupon bonds are outstanding, 25 years to maturity, selling

for 108 percent of par; the bonds have a $1,000 par value each and make

semiannual payments.

Common:

8,000,000 shares outstanding, selling for $181.30 per share; you have stock

prices and S&P 500 index value for the past five years.

Preferred:

442,000 shares of 5 percent preferred stock outstanding, selling for $80.20 per

share and having a par value of $100.

Market:

9 percent expected market risk premium; 3 percent risk-free rate.

Answer 1

Project should be accepted as NPV is greater than Zero and IRR is greater than required rate of return.

working Images enclosed

years Cash flow ON (36.16) 9.28 9.28 9.28 9.28 18.98 3.33 15% 3.90 NPV IRR IS PB


Cost of Debt (after tax) Cost of Equity Cost of Pref Equity WACC Cost % 4.68% 12.00% 6.23% No of shares Weight 222,000 2.56% 8,000,000 92.34% 442,000 5.10% 8,664,000 100.00% After Tax Cost 0.12% 11.08% 0.32% 11.52%

Figures in million $

sales Dep 135.20 3.921 1171 9.28 After Tax Cash Flow

Sales = 13000 X 10400 = Variable cost = 13000x9000 = Depreciation = 31.36/8 2 Tax Rate = 35%. 135 Million you 117 Million your 3.92 Million year