This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. 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 $4.1 million on an aftertax basis. In five years, the aftertax value of the land will be $4.4 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 $37 million to build. The following market data on DEI’s securities is current:

Debt: Common stock: Preferred stock: Market. 205,000 bonds with a coupon rate of 5.8 percent outstanding, 25 years to maturity, selling for 106 percent of par; the bonds have a $1,000 par value each and make semiannual payments. 8,600,000 shares outstanding, selling for $67 per share; the beta is 1.15. 500,000 shares of 4 percent preferred stock outstanding, selling for $83 per share; the stock has a par value of $100. 7 percent expected market risk premium; 3.1 percent risk-free rate.