Maximum initial cost the company would be willing to pay

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Och, Inc., is considering a project that will result in initial after tax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of .75, a cost of equity of 11.4 percent, and an after tax cost of debt of 4.2 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?

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Reference no: EM13806651

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Maximum initial cost the company would be willing to pay : Och, Inc., is considering a project that will result in initial after tax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of..

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