Eagle Sports Systems (ESS) Inc. is considering a project (Project 2020) that requires an investment of $4 million for new manufacturing equipment. This project is in the same line of business as the firms current operations and is therefore not expected to alter the risk of the firm. ESSs manager of finance is estimating the discount rate required to evaluate the project. The most recent balance sheet is provided below.

Assets						Liabilities
Cash	$		100,000			Accounts Payable	$		85,000
Accounts Receivable	$		125,000			Other current liabilities	$		25,000
Inventories	$		525,000			Total Current Liabilities	$		110,000
Total Current Assets	$		750,000
						LT Debt (1)	$		2,500,000
Net Fixed Assets	$		8,565,000			Preferred shares (2)	$		800,000
						Common Stock (3)	$		4,000,000
						Retained earnings	$		1,905,000
						Total Liabilities &
Total Assets	$		9,315,000			Owner's Equity	$		9,315,000

Notes to financial statements:

(1) The 7% semi-annual coupon bonds have a face value of $1,000, were issued 5 years ago and have 15 years to maturity. Flotation costs to issue new bonds = 4%

(2) The preferred shares have a $50 par value and 8% dividend. Flotation costs to issue new preferred = 5%.

(3) There are 250,000 common shares outstanding. Flotation costs to issue new common = 6%.

Additional information you may find useful:

• The current market price of ESS's securities: common stock = $47.50 per share; preferred shares = $44 per share and their bonds are selling for a quoted price = 104
• The return on Government of Canada T'Bills = 1%, the S&P/TSX Composite Index has a standard deviation = 12% and a return = 8%.
• ESS shares have a correlation with the market portfolio = 0.85 and a standard deviation = 27.5%
• The marginal tax rate = 35%
• Present value of the CCA tax shield associated for this project = $657,080
• Present value of the ending cashflows for this project = $392,320
• Present value of the after-tax operating cashflows for this project = $3,255,800
• The firm does not have enough internally funds to finance the equity portion of this project.

e) Calculate the discount rate that should be used to evaluate Project 2020.

f) Calculate the total initial investment for Project 2020.

g) Based on a NPV analysis, should Project 2020 be accepted? Show your work.