Question: 1 6 . Lebleu, Inc., is considering a project that will result in initial aftertax casj savngs of $ 2 . 9 million at the

16 .

Lebleu, Inc., is considering a project that will result in initial aftertax casj savngs of $

2.9

million at the end of the first year, and these savings will grow at a rate of

2 %

per year indefinitely. The firm has a target debt

-

equity ratio of

. 75,

a cost of equity of

10 %,

and an aftertax cost of debt of

4.6 % .

The cost

-

saving proposal is somewhat riskier than the usual project the firm undertakes, management uses the subjective approach and applies an adjustment actor of

+ 3 %

to the cost of capital foer such risky projects. Under what circumstances should the company take on the project?

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