T. Chemicals is a major producer of oil-based fertilizers in the US. The companys stock is currently selling for $80 per share and there are 10 million shares outstanding. The company also has debt outstanding with a market value of $400 million. The interest rate on debt is 10%. The companys current capital structure approximates well its target position. The companys equity beta is equal to 2.0.

The company is considering an expansion project expected to generate a rate of return of 20% annually. Assuming a corporate tax rate of 50%, risk free rate of 8%, and the expected rate of return on the market portfolio of 17%, determine whether the company should go ahead with the project under the following two scenarios:

1. The project has the same risk level as the company.

2. The projects risk is higher than that of the company. The projects unlevered beta is 2.5. Also, consistent with its higher risk level, the project is expected to generate a rate of return of 25%. Further, because of the projects higher risk level, the company has decided to use a more conservative capital structure represented by a debt-to-asset ratio of 15%.