What will be the maximum initial cost such that the company

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Scanlin, Inc., is considering a project that will result in initial cash savings of $2.7 million at the end of the first year, and these savings will grow at a rate of 4 percent per year indefinitely. The firm has a target debt-equity ratio of 0.90, a cost of equity of 13 percent, and a cost of debt of 4.8 percent. The cost-savings proposal is somewhat riskier than the usual project 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 will be the maximum initial cost such that the company should take on the project? Assume no taxes and depreciation.?

Reference no: EM131905735

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