29) ABC Inc. is considering a project that will result in an initial after-tax cash flow of $6 million at the end of the first year. These cash flows will grow at a rate of 3% per year indefinitely. The firm has a debt weight of 37.1% and an equity weight of 62.9%. The cost of equity is 13.4%, with a beta of 1.3. The after-tax cost of debt of 5.3%. The project 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. Calculate the WACC that should be used for this project. (5 points) Project discount rate = .1239, or 12.39% What is the maximum cost the company would be willing to pay for this project? (The negative cash flow in year 0) (7 points) $63,897,763.58. The project discount rate is the companys cost of capital plus a risk adjustment factor. A debtequity ratio of .59 implies a weight of debt of .59 / 1.59 and a weight of equity of 1 / 1.59, so the companys WACC is: WACC = (.371)(.053) + (.629)(.134) WACC = .1039, or 10.39% Adjusting for risk, the project discount rate is: Project discount rate = .1039 + .02 Project discount rate = .1239, or 12.39% The company should only accept the project if the NPV is zero. The cash flows are a growing annuity. So, the present value of the savings is: PV = $6,000,000 / (.1239 .030) PV = $63,897,763.58 The project should only be undertaken if its cost is less than $63,897,763.58.

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