Question: 1. Reserve Inc. is considering a project that will result in initial after-tax cash savings of $6 million at the end of the first year,

1. Reserve Inc. is considering a project that will result in

1. Reserve Inc. is considering a project that will result in initial after-tax cash savings of $6 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 0.70, a cost of equity of 16 percent, and an after-tax cost of debt of 6 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 +2 percent to the cost of capital for such risky projects (meaning that the cost of capital for the project should be higher than the cost of capital for the firm by 2 percent). Under what circumstances should this Reserve Inc. take on the project

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