Cannot find System.Xaml?

On my machine it's located at

C:\Windows\Microsoft.NET\Framework\v4.0.30319\System.Xaml.dll

and it's available in the add references dialog as well (checked in a .Net4 target project, which might be your issue here).

Your project is probably targeting .Net 3.5, which does not have the required DLL.

You can set the Framework Version in Project Properties.