The American Chemical Corporation (ACC) is a multinational manufacturer of industrial chemical products. ACC has made great

Question:

The American Chemical (ACC) is a multinational manufacturer of industrial chemical products. ACC has made great progress in reducing energy costs and has implemented several cogeneration projects in the United States and Puerto Rico, including the completion of a 35-megawatt (MW) unit in Chicago and a 29-MW unit in Baton Rouge. The division of ACC being considered for one of its more recent cogeneration projects is a chemical plant located in Texas. The plant has a power usage of 80 million kilowatt hours (kWh) annually. However, on the average, it uses 85% of its 10-MW capacity, which would bring the average power usage to 68 million kWh annually. Texas Electric currently charges $0.09 per kWh of electric consumption for the ACC plant, a rate that is considered high throughout the industry.
Because ACC's power consumption is so large, the purchase of a cogeneration unit would be desirable. Installation of the unit would allow ACC to generate its own power and to avoid the annual $6,120,000 expense to Texas Electric. The total initial investment cost would be $10,500,000, including $10,000,000 for the purchase of the power unit itself (which is a gas-fired 10-MW Allison 571), engineering, design, and site preparation, and $500,000 for the purchase of interconnection equipment (such as poles and lines) that will be used to interface the co-generator with the existing utility facilities.
ACC is considering two financing options:
• ACC could finance $2,000,000 through the manufacturer at 10% for 10 years and the remaining $8,500,000 through issuing common stock. The flotation cost for a offering is 8.1%, and the stock will be priced at $45 per share.
• Investment bankers have indicated that 10-year 9% bonds could be sold at a price of $900 for each $ 1,000 bond. The flotation costs would be 1.9% to raise $10.5 million.
(a) Determine the debt-repayment schedule for the term loan from the equipment manufacturer.
(b) Determine the flotation costs and the number of common to sell to raise the $8,500,000.
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