Chattingham Industries is considering the purchase of new machinery which will result in annual cost savings over its existing manufacturing operations. Currently, Chattingham has a debt-equity ratio of 60 percent which it considers optimal.

The following market data on Chattinghams securities is current:

Debt:	200,000 bonds with a coupon rate of 5.8 percent outstanding, 25 years to maturity, selling for 106 percent of par; $1,000 par value each and make semiannual payments.
Common stock:	5 million shares outstanding, selling for $66 per share; the stock beta is 1.15.
Market:	7 percent market risk premium; 3.1 percent risk-free rate.

To raise the funds necessary to purchase the machinery, the following options exist:

Chattingham can raise up to $5 million in new debt with no change in its current cost. If more debt is required, the initial cost will increase by 2 percent and if more than 10 million in debt is required, the cost will rise by another 2 percent. Net income for the previous year was $10 million, and is expected to increase by 10 percent this year. Chattingham expects to maintain its dividend payout ratio of 40 percent on the 5 million shares of common stock outstanding. If it must sell new common stock, it would encounter a 10 percent flotation cost on the first $2 million, a 15 percent cost if more than $2 million but less than $4 million is needed, and a 20 percent cost if more than $4 million of new common stock is required. Chattinghams tax rate is 30 percent.

New machinery details:

Cost	$20.5 million dollars to purchase and install.
Useful life	8 years
Initial net working capital required	$75,000 (will be refunded at the end of the 8-year useful life)
Salvage value	$1,250,000
Depreciation method	straight-line
Estimated annual cost savings	$3,500,000
Annual maintenance cost	$$25,000

A. Compute the WACC associated with each of the break points previously computed (there will be 6 in total).

B. Given the WACCs computed, and the fact that Chattingham is considering the purchase of the machinery, determine the amount of new debt that must be issued to finance the machinery.

Drawing from your knowledge gained in FINA A718, answer the following two questions:

A. Determine the annual operating cash flow (OCF) associated with this machine purchase.

B. What is the net present value (NPV) and internal rate of return (IRR) associated with the purchase of the machinery? Should the project be accepted? Explain.