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Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $2.7 million at the end of the fi rst year, and these savings will grow at a rate of 4 percent per year indefi nitely. The fi rm has a target debt–equity ratio of .90, a cost of equity of 13 percent, and an aftertax cost of debt of 4.8 percent. The cost-saving proposal is somewhat riskier than the usual project the fi rm undertakes; management uses the subjective approach and applies an adjustment factor of 2 percent to the cost of capital for such risky projects. Under what circumstances should the company take on the project?
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $2.7 million at the end of the fi rst year, and these savings will grow at a rate of 4 percent per year indefi nitely. The fi rm has a target debt–equity ratio of .90, a cost of equity of 13 percent, and an aftertax cost of debt of 4.8 percent. The cost-saving proposal is somewhat riskier than the usual project the fi rm undertakes; management uses the subjective approach and applies an adjustment factor of 2 percent to the cost of capital for such risky projects. Under what circumstances should the company take on the project?
