Question 7. (10 points) Zanzibar Delights is considering investing in a new project for $21 million. The project will produce free cash flows of $2.95 million next year, $3.55 million in 2 years, and $4.2 million in 3 years and then the cash flows will grow by 2.5% per year forever. The beta of the project is 1.1. The risk free rate is 3% and the expected return on the market is 9%. Assume no taxes.

a)What is the correct discount rate for Zanzibar Delights to use to evaluate the project?

b)What is the value of the project to Zanzibar Delights?

c)Should Zanzibar Delights invest in the new project?