Retlaw Corporation (RC) manufactures time series photographicequipment. It is currently at its target debt/equity ratio of 0.74.It’s considering building a new $48 million manufacturing facility.This new plant is expected to generate after-tax cash flows of $8.4million in perpetuity. The company raises all equity from outsidefinancing. There are three financing options: 1. A new issue ofcommon stock: The flotation costs of the new common stock would be7 percent of the amount raised. The required return on thecompany’s new equity is 14 percent. 2. A new issue of 20-yearbonds: The flotation costs of the new bonds would be 4 percent ofthe proceeds. If the company issues these new bonds at an annualcoupon rate of 8.0 percent, they will sell at par. 3. Increased useof accounts payable financing: Because this financing is part ofthe company’s ongoing daily business, it has no flotation costs,and the company assigns it a cost that is the same as the overallfirm WACC. Management has a target ratio of accounts payable tolong-term debt of 0.135. (Assume there is no difference between thepre-tax and after-tax accounts payable cost.) What is the NPV ofthe new plant? Assume that RC has a 45 percent tax rate
