bank 3009 corporate valuations and risk management

You have the following initial information on Finance Co. on which to base your calculations and discussion for questions 1) and 2):

Current long-term and target debt-equity ratio (D:E) = 1:3

Corporate tax rate (TC) = 30%

Expected Inflation = 1.55%

Equity beta (E) = 1.6345

Debt beta (D) = 0.15

Expected market premium (rM rF) = 6.00%

Risk-free rate (rF) =2%

1) The CEO of Financeur Co., for which you are CFO, has requested that you evaluate a potential investment in a new project. The proposed project requires an initial outlay of $7.26 billion. Once completed (1 year from initial outlay) it will provide a real net cash flow of $555 million in perpetuity following its completion. It has the same business risk as Financeur Co.s existing activities and will be funded using the firms current target D:E ratio.

a) What is the nominal weighted-average cost of capital (WACC) for this project?

b) As CFO, do you recommend investment in this project? Justify your answer (numerically).