Urbane Ltd is considering a new project that will require equipment costing $2,000,000. The company believes the project will generate after-tax cash flows of $575,000 per year for 5 years, with the first cash flow starting at the end of the first year.

To fund this project Urbane Ltd will issue both new bonds and new ordinary shares.

The company will raise $400,000 by a new issue of5-year bonds with face value of $1,000, an annual coupon rate of 7% pa, and a yield to maturity of 6.25% pa. The flotation costs of the new debt would be 2.5% of the amount raised.

Urbane Ltd will raise the rest of the funds by a new issue of ordinary shares. Urbane Ltd has a beta of 1.75, the risk-free rate is 2.5% pa and the market risk premium is 7% pa.The flotation costs of the new share issue would be 10% of the amount raised.

The company tax rate is 30%.

As the assistant to the finance manager it is your responsibility to analyse the project to determine if Urbane should accept this project or not.

1. Calculate Urbane Ltd's average percentage floatation cost of the new fund raising. (Show answer as a percentage correct to 2 decimal places.)
2. Calculate the true cost of the new project. (Show answer correct to 2 decimal places.)
3. Calculate Urbane Ltd's weighted average cost of capital (WACC). (Show answer as a percentage correct to 3 decimal places.)
4. Calculate the net present value (NPV) of the new project. (Show answer correct to 2 decimal places.)
5. Explain if Urbane Ltd should accept the new project or not.