Suppose we go three years back riding a Time -Machine and see Premier National Group (PNG) is considering whether to refund an old issue of $40,000,000, 8.5 percent coupon (paid annually) twentyyear bonds that were sold eight years ago. PNG's investment bank when contacted about refinancing assures a new issue of $50,000,000 twelve-year bonds with a coupon rate of 4.5 percent (paid annually). A call premium of 6.4 percent will be required to retire the old bonds and flotation costs of $2,000,000 will apply to the new issue?

The tax rate applicable is 37 percent and PNG expects that there will be a onemonth overlap during which any funds can be invested in Treasury bills yielding 1.3 percent. The additional $10,000,000 from the new bond issue could be invested in a twelve-year project with an expected net present value of $1,200,000. Should PNG refund the old issue of $40,000,000 bonds?  Show all four working steps clearly?You MUST explain what rate would be the appropriate discount rate?