Due to the ongoing COVID 19 Pandemic, Sterilic Ltd had decided to expand their sanitation product line to include the production of disposable face masks. The equipment will cost Sterilic $1,575,000 and it will cost $425,000 to install. Sterilic believes there will be a steady demand of masks at least for next five years and so it expects this project will generate after-tax cash flows of $654,500 per year for the 5 year life of the project, with the first cash flow starting at the end of first year.

Sterilic will raise the fund for the new project by a mix of new debt and new equity that will maintain its target debt to equity ratio of 0.25. Sterilic wishes to raise the funds by:

1. A new issue of ordinary shares. The floatation costs of the new share issue would be 10% of the amount raised. The beta for Sterilic is 1.75, the risk free rate is 2.5% and the market rate of return is 9.5%.
2. A new issue of 5-year Bonds with yield to maturity of 6.25% pa. The floatation costs of the new debt would be 2.5% of the amount raised.