A firm is considering a 7-year project to produce and sell machines. The project will use land that was purchased for $5.0 million three years ago for a different project that did not proceed. The land has recently been appraised to have a value of $6.5 million. It is anticipated that in 7-years the land will have an after-tax value of $7.2 million, although the company does not anticipate selling the land in 7 years but instead using it for other projects. The project requires building a new manufacturing plant on this land. The plant and new equipment will cost $25 million. The following market data on the companys securities is as follows:

Debt: 100,000 6.8 percent coupon bonds outstanding, 20 years to maturity, selling for 97 percent of par, the bonds have a $1,000 par value each and make semi-annual payments.

Common stock: 3,400,000 shares outstanding, selling for $21 per share; the beta is 1.20. Preferred stock: 850,000 shares of 6.00 percent preferred stock outstanding, selling for $95 per share and having a par value of $100.

Market: 8 percent expected market risk premium; 3.0 percent risk-free rate.

The company has flotation costs of 8.0 percent on new common stock issues; 6.0 percent on new preferred stock issues, and 4.0 percent on new debt issues. The companys tax rate is 23 percent. The project requires $2,900,000 in initial net working capital investment to get operational. Assume the company raises all equity for new projects externally.

1. Calculate the projects initial time 0 cash flow, taking into account all side effects. [Assume that the initial working capital does not require the company to raise outside funds.

2. The new project is somewhat riskier than a typical project for the company. You believe that an adjustment factor of +2 percent is required to account for the increased riskiness. Calculate the appropriate discount rate to use when evaluating the project.