NextGenTech is considering a project that will result in initial aftertax cash savings of $3.5 million at
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NextGenTech 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 4 percent per year indefinitely. The firm has a target debt-equity ratio of .55, a cost of equity of 13 percent, and an aftertax cost of debt of 5.5 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 per cent to the cost of capital for such risky projects. Under what circumstances should NextGenTech take on the project?
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