Suppose your company needs $14 million to build a new assembly line. Your target debt-equity ratio is 0.84. The flotation cost for new equity is 9.5 percent, but the floatation cost for debt is only 2.5 percent.

1. Assume the use of external equity. What is the true cost of building the new assembly line after taking flotation costs and target capital structure into account?

2. Explain how the use of internal equity rather than external equity affects the analysis of an in investment project. No calculations needed, just reasoning.