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Cost of capital for risky ptojects

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Reference no: EM132364344

Och SpA is considering a project that will result in initial after tax cash savings of €3.5million at the end of the first year, and these savings wilk grow at a rate of 5%/year indefinately. The firm has a target debt-equity ratio of 0.65, a cost of equity of 15% and an after tax cost of debt of 5.5%. The cost saving proposal is somewhat riskier than the usual project the firm undertakes. Management uses the subjective approach and applies an adjustment factor of 2% to the cost of capital for such risky ptojects. Under what circumstances should Och take the project?

Reference no: EM132364344

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