18-7. Mullet Technologies is considering whether or not to refund a $75 million, 12% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $5 million of flotation costs on the 12% bonds over the issues 30-year life. Mullets investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 10% in todays market. Neither they nor Mullets management anticipate that interest rates will fall below 10% any time soon, but there is a chance that rates will increase. A call premium of 12% would be required to retire the old bonds, and flotation costs on the new issue would amount to $5million.Mullets marginal federal-plus-state tax rate is 40%.The new bonds would be issued 1month before the old bonds are called, with the proceeds being invested in short-term government securities returning 6% annually during the interim period.

a. Conduct a complete bond refunding analysis. What is the bond refundings NPV?

b. What factors would influence Mullets decision to refund now rather than later?