flotation costs and npv

Project Description:

photochronograph corporation (pc) manufactures time series photographic equipment. it is currently at its target debt–equity ratio of .55. it’s considering building a new $50 million manufacturing facility. this new plant is expected to generate aftertax cash flows of $6.7 million a year in perpetuity. the company raises all equity from outside financing. there are three financing options:

1. a new issue of common stock: the flotation costs of the new common stock would be 8 percent of the amount raised. the required return on the company’s new equity is 14 percent.

2. a new issue of 20-year bonds: the flotation costs of the new bonds would be 4 percent of the proceeds. if the company issues these new bonds at an annual coupon rate of 8 percent, they will sell at par.

3. increased use of accounts payable financing: because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm wacc. management has a target ratio of accounts payable to long-term debt of .20. (assume there is no difference between the pretax and aftertax accounts payable cost.)

what is the npv of the new plant? assume that pc has a 35 percent tax rate. (do not round intermediate calculations. enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
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Price Type: Negotiable

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