What is the discount rate that should be set for the project

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Reference no: EM13911726

Bono is considering a project that will result in initial aftertax cash savings of $3.8 million at the end of the first year, and these savings will grow at a rate of 5 percent per year indefinitely. The firm has a target debt-equity ratio of .64, a cost of equity of 12 percent, and an aftertax cost of debt of 5.8 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 discount rate that should be set for the project?

Reference no: EM13911726

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