SAIPA Corp. is a publicly traded company that specializes in car manufacturing. The company's debt-to-equity ratio is 1/3 and it plans to maintain the same debt-to-equity ratio indefinitely. SAIPA's cost of debt is 7%, and its equity beta is 1.5. Risk free rate is 5%, market risk premium is also 5%, and corporate tax rate is 40%.

a. Suppose that SAIPA is contemplating whether to start a new car production line. This project will be financed with 25% debt and 75% equity. The cost of debt for the new project is the same as current SAIPA's cost of debts. What discount rate should SAIPA use to discount the cash flows from its new car production project?