Dominion Power is evaluating a new method for producing green energy. Testing the proof of concept will require an immediate cash outflow of $10 million. Over the twoyear testing period, the project will not generate any profits, but will demonstrate whether this new method of energy production is feasible and sustainable. Managers are truly uncertain about the outcome of the testing, so they assume there is a 50% probability that the results of the testing period will show this new means of energy production is viable. If so, Dominion will invest $500 million in PP&E to generate power using this new method on a mass scale in the northern Virginia region. The PP&E will be depreciated on a straightline basis over 30 years (no salvage value expected at the end of 30 years). The project will generate net income of $40 million per year for 30 years (starting one year from the time of the $500 million investment). Once testing is completed, and assuming Dominion goes forward with the project, it will be considered average risk. However, during the proof of concept phase the project is viewed as of above-average risk, such that investors should expect a 15% return on the initial expenditure. The firm is financed with 40% debt and 60% equity. The cost of equity is 14% and cost of debt is 7%. The firm pays taxes at a marginal rate of 35%. a. What is the firms (after-tax) WACC? b. What is the NPV of the project (including the proof of concept test phase)? c. Should Dominion Power invest $10 million in the proof of concept?

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