Question: Och, Inc., is considering a project that will result in initial aftertax cash savings of $3.5 million at the end of the first year, and

Och, Inc., is considering a project that will result in initial aftertax cash savings of $3.5 million at the end of the first year, and these savings will grow at a

rate of 3 percent per year indefinitely. The firm has a target debt–equity ratio of .55, a cost of equity of 12.4 percent, and an after tax cost of debt of 4.9 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. Under what circumstances should the company take on the project?

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Using the debtequity ratio to calculate the WACC we find R WACC 55155049 1155124 R WAC... View full answer

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