Question: Och, Inc, is considering a project that will result in initial cash savings of $1.85 million at the end of the first year, and these

Och, Inc, is considering a project that will result in initial cash savings of $1.85 million at the end of the first year, and these savings will grow at a rate of 3% per year indefinitely. The target debt-equity ratio of 0.65, a cost of equity of 11%, and an aftertax cost of debt of 4.3%. 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 % to the cost of capital for such risk projects.

Under what circumstances should the company take on the project?

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