1. (15 points) Union Pacific Corporation (UNP), which is the largest railroad in the U.S. in track miles, has constructed a new railroad yard in Hearne, Texas. The capital expenditure is $550 million, the largest in the companys history. The railroad predicts a free cash flow of $84 million per year from the project, beginning in 2021. From the standpoint of net present value, do you think this is a good investment? To guide your analysis, please see the railroads Value Line summary page on Blackboard under UNP Value Line F21, which includes UNPs (financial) capital structure. The companys bond rating is A-, as assessed by Moodys Investor Services, with an interest rate of 3.86%. For ease of estimation, assume a corporate tax rate of 21%. Please show all your work.

Hint: To estimate the WACC, you will need to estimate the cost of equity from the estimates of the capital asset pricing model in problem 7. To do so, you will need to obtain UNPs beta. Please estimate it from the data file, posted on Blackboard, for the second problem set, following the same steps used in the first assignment. Because the UNP data are annual but the CAPM data are monthly, you will have to first annualize the CAPM estimates. After doing so, you will then multiply the risk premium by beta to estimate the cost of equity.

b. (5 points) In what year does the internal rate of return exceed the WACC? What do you conclude by comparing the internal rate of return to a cost of capital that equals the interest rate on its debt, 3.86%, plus four percentage points? What do you conclude about the profitability of the project now? Please show your work.