You were hired to evaluate bb Inc. expansion project, which is expected to produce $5.5 million of revenue per year for six years. Cash expenses will be $2 million, and depreciation expenses will be 1 million per year. The project also requires a one time expenditure of $450,000 for working capital to start in years zero, and it will be recovered in the last year of the project year six. In addition, the firmed common stock has a better of .95. The risk free rate is 3.7% and they expected return on the market is 11%. The before tax cost of debt is 7%, and the tax rate is 27%. Their capital structure consists of 55% debt and 45% common equity.

1. what is the yearly free cash flow on the project? Show all of your work.

2. what is the firms WACC? Show all of your work.

3. should the firm except this project

if it requires an initial investment of 9 million, why or why not? Explain. Explain using the appropriate equations. Show all of your work.

4. what is the probability index of this project?

5. Suppose at the return on the market increases to 15%. Show how the expansion decision is affected by this change, if any show all of your work. Explain.