Retro Inc. has 1,100 bonds outstanding that are selling for $992 each. The bonds carry a 6.0 percent coupon, pay interest semi-annually, and mature in 7.5 years. The company also has 9,500 shares of 5% preferred stock at a market price of $40 per share. This month, the company paid an annual dividend in the amount of $1.20 per share. The dividend growth rate is 5.0 percent. The common stock is priced at $30 a share and there are 34,500 shares outstanding. The company is considering a project that is equally as risky as the overall company. This project has initial costs of $630,000 and operating cash flows of $80,000 a year for the next 10 years and salvage value of $20,000 at the end of 10 years. The net working capital (NWC) is expected to increase by $10,000 a year until the end of the project life. All the NWCs will be recovered when the project is completed. The project will be depreciated straight-line to zero over the project’s 10-year life. The tax rate is 21%. 

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2. What is Retro’s weighted average cost of capital?
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3. What is the net present value (NPV) of this project? Should you accept the project? Explain why.
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4. What is the internal rate of return (IRR) of this project? Should you accept the project if you apply the IRR decision rule?
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