Initial cost company would be willing to pay for project

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Och, Inc., is considering a project that will result in initial aftertax cash savings of $1.85 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The company has a target debt–equity ratio of .85, a cost of equity of 12.5 percent, and an aftertax cost of debt of 5.3 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project?

Reference no: EM131346602

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