The Phillipsburg Power Company is considering refunding its $250 million, 11.5 percent debt issue with a 10 percent, 15-year debt issue. The existing (old) issue also matures in 15 years and now is callable at 103.5 percent of par.
The unamortized issuance cost on the old issue is $937,500, and the issuance cost of the new issue is 0.5 percent. Both the new and old debt issues will be outstanding for three weeks, resulting in overlapping interest. Phillipsburg's weighted cost of capital is 10 percent, and its marginal tax rate is 40 percent.
The company's chief financial officer feels that the decline in interest rates has bottomed out. Determine the net present value of refunding the old bond issue.