Firm XYZ has an outstanding project: Delta. This will be a 5-year project. The firm has acquired the land which costs $7.5 million (Hint: this is the initial cash outflow). The project requires $2.5 million in initial net working capital (This is, again, the initial cash outflow, and we assume that the net working capital is not subject to the floatation cost).

XYZ needs to finance $55 million for the plant and equipment via bond, common stock, and preferred stock issues (Note this is also the initial cost, and the $55 million will be subject to the floatation cost). The following market data on XYZs securities is current:

Debt: 130,000 6.1 percent coupon bond outstanding. 25 years to maturities, selling for 104 percent of par value. The bond has a par value of $2,000, and makes semi-annual payments.

Common stock: 9,900,000 shares outstanding, selling for $68 per share. The beta is 1.20.

Preferred stock: 400,000 shares of 4.20 percent preferred stock outstanding, selling for $87 per share and having a par value of $100.

Market: 7 percent expected market risk premium; 3.1 percent risk-free rate.

Floatation cost: The underwriter charges 6.5 percent on new common stock issues, 4.5 percent on new preferred stock issues, and 3 percent on new debt issues. XYZs marginal tax rate is 25 percent.

Questions:

5. The new project Delta is riskier than a typical project of XYZ. The adjust factor is +2 percent based on the typical WACC. What is the appropriate discount rate to use in this project?
6. Based on the information above, what are the IRR and NPV of Project Delta? Are you going to accept this Project Delta?

Please show all your work if you can. Thanks!