1. Capital Budgeting (and Cost of Capital): (Read the entire question carefully before you spend any time on calculations!) Second Hand Ideas Inc. (SHI Inc. for short) is a maker of various low-tech small domestic appliances. SHI issued 800,000 20-year 7% annual coupon bonds 8 years ago, with a face value of $1,000 each. SHI's bonds have yield-to-maturity of 6%. SHI has 45,050,000 shares of stock outstanding and the current stock price is $32. The beta of SHI common stock equals 1.1. The expected return on the market portfolio is 9% and the interest rate on safe government securities equals 4%. The effective marginal corporate tax rate is 40%. SHI is considering a new product called the Blueberry SmartFone, a high-tech phone that will compete with similar products made by other smartphone makers. The average pure play firm in the smart-phone industry is financed with 100% equity and has a beta of 2, The Blueberry project requires an initial investment of S400 million today (the necessary equipment has a CCA rate of 30% and 40 million salvage value in four years). The following table is a forecast of project related revenues and expenses (excluding depreciation): Forecast (in millions of CS) Sales Year 1 160 90 Year 2 220 80 Year 3 280 120 Year 4 180 80 Expenses (Excluding CCA) The project requires an immediate $10 million increase in Net Working Capital (NWC) at-O. In subsequent years, NWC will be 10% of total sales. a. Calculate the discount rate that SHI's should use to evaluate the Blueberry project. Clearly state any assumptions that you make! b. Calculate the NPV for this investment. Should SHIl implement this project