Ariana, Inc., is considering a project that will result in initial aftertax cash savings of $3.8...

 

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Ariana, Inc., is considering a project that will result in initial aftertax cash savings of $3.8 million at the end of the first year, and these savings will grow at a rate of 1.9 percent per year, indefinitely. The firm has a target debt-equity ratio of .55, a cost of equity of 10.6 percent, and an aftertax cost of debt of 3.2 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. Under what circumstances should the company take on the project? Ariana, Inc., is considering a project that will result in initial aftertax cash savings of $3.8 million at the end of the first year, and these savings will grow at a rate of 1.9 percent per year, indefinitely. The firm has a target debt-equity ratio of .55, a cost of equity of 10.6 percent, and an aftertax cost of debt of 3.2 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. Under what circumstances should the company take on the project?

Answer rating: 100% (QA)

To determine whether Ariana Inc should take on the project we need to calculate the net present valu... View the full answer