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Inc. is considering a project that will result in initial aftertax cash savings of $4.1 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 0.56, a cost of equity of 15 percent, and an aftertax cost of debt of 4 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3.6 percent to the cost of capital for such risky projects.

(a)Calculate the WACC.
Weighted average cost of capital %

(b)What is the maximum cost Inc. would be willing to pay for this project?
PV of future CF $

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Accounting Basics, Accounting

Category:- Accounting Basics
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