The Southern Co., an electric utility, is planning its compliance with amendments to the Clean Air Act. The Act established a system of tradeable permits for sulfur dioxide emissions. The company must decide whether to install pollution control equipment and generate excess permits for sale to other firms, or to emit larger quantities of sulfur dioxide, save capital costs, and purchase pollution permits. To calculate Southerns WACC, you first need to gather information on the firm's cost of raising funds from various sources. You learn that Southern could issue 20-year corporate bonds at a coupon rate of 8%. As a result of current interest rates, the bonds could be sold for $1,005 each. These bonds have flotation costs of $35 per bond, pay interest annually, and have a par value of $1,000. A corporate tax rate of 40% applies. Southern can raise additional funds through retained earnings or new issues of common stock. You estimate that Southern will have $250,000 of retained earnings available for this project. Their common stock is currently selling for $58.25 per share. The most recent dividend paid was in the amount of $2.00. Southern's dividends have previously grown at a rate of 6%, and this growth rate is expected to continue indefinitely. If the firm wanted to sell new shares of common stock, after underpricing and flotation costs, they could do so for $52.75 per share. A final source from which funds could be raised is via preferred stock. $100-par preferred stock can be issued at an 10% annual dividend rate. After flotation costs, the preferred stock would sell for $95.00 per share. Southerns target or optimal capital structure to be 35% Debt, 5% Preferred Stock, and 60% Common Equity. You also estimated the following cash flows associated with the project: The cost of the pollution control system will be $1,500,000; Southern will need to increase their workforce by 2 employees, or $150,000, to implement and maintain the new pollution control system; Implementation of the pollution control system should generate $200,000 of net after-tax operating cash flows from the sale of the extra permits each year for the 20 years under consideration; and At the end of the project, the pollution control system could be sold to net Southern $10,000 after-tax. Evaluate this project for Southern. Since you will be the only one involved in communicating with Southerns Board, you must completely understand all of the assumptions and calculations that will be made throughout the analysis. For this reason, the analysis must be clear as well as technically correct.

Questions: 1. What is the net initial investment (NINV) for the pollution control system?