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GroPro Products, a manufacturer of recycled containers for the horticultural industry, has outgrown their current facilities. They plan to build a new production and storage facility at an estimated cost of $20 million. In addition, they will require new equipment at a cost of $5 million. They have secured a new location on the outskirts of Monroe County for their new production facility. Before they can begin construction of the facility, they must have an environmental assessment of the site completed at a cost of $50,000. This cost must be paid whether the project goes ahead or not. Costs to ship the equipment will be $20,000. The project will not alter the average risk of the firm. A partial balance sheet is as follows:

Bonds (6.25% semi-annual coupon, $1,000 par, 20 years to maturity)	$8,500,000
Preferred stock ($100 par, 9% annual dividend)	2,500,000
Common stock (200,000 shares outstanding)	9,200,000
Retained earnings	7,050,000

You have been given the job of calculating the appropriate discount rate to use to evaluate the project, and to determine the total cost of the project. Your research has provided the following additional information:

Bonds are currently quoted at 102.8. The S&P/TSX Composite Index is expected to return a premium of 10%. T-bills are currently yielding 2.5%. The firms dividends have been growing at an annual rate of 2%, however analysts are forecasting a future growth rate of 4%. The common stock of ProGro Products trades at $85 per share. The preferred stock of ProGro Products trades at $120 per share. The companys systematic risk is 1.6 times that of the market.

The marginal tax rate is 40%. Flotation costs to issue new debt are 2.5%, new preferred shares are 3.5%, and new common shares are 5.25%. The firm has no internally generated funds available.

1. Calculate the before-tax cost of debt.

2. Calculate the cost of preferred shares.

3. Calculate the cost of common equity.

4. Calculate the capital structure weights used to compute the WACC?

5. Calculate the firms WACC.

6. Calculate the dollar amount of flotation costs required for this project.

7. You have calculated the PV of the future benefits to be $26,000,000. What is the NPV of the project after taking into consideration the full effects of flotation costs? Would you accept or reject the project? What can you say about the Internal Rate of Return (IRR) of the project?

8. How would your answer change if the company had $15,000,000 of internal funds available? (No calculation. Briefly explain the impact on the cash flow for the project

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