We are examining a new project, which is a scale expansion of our existing business, i.e. the nature of our new project is very similar to our existing business. We are a focused firm, operating in one industry. We expect to sell 6 million units per year at a price of $650 and a variable cost of $585. Annual fixed costs are expected to be $300 million. The project requires an initial investment of $200 million in equipment, to be depreciated on a straight-line basis over the 10 years. It also requires an investment of $100 million in working capital, which will be fully recovered at the end of the project. Our companys equity beta is 1.2, and 30% of our capital structure is debt. However, we expect to finance the project with only 10% debt. The tax rate is 35%, the ten-year treasury bonds are yielding 4.1%, and the equity market risk premium is 7%. We expect to pay an interest rate of 5% on our debt. Assume the debt is riskless, i.e. " = 0.

a) The new project is a scale expansion. Why is this information relevant in order to evaluate the project? Discuss.

b) Imagine the project was significantly different from our existing business. Explain how you would obtain relevant variables for valuation

c) compute the WACC of the new project