Question: Rocky Mountain Ltd is considering a project that will result in initial cash savings of $8 million at the end of the first year, and

Rocky Mountain Ltd is considering a project that will result in initial cash savings of $8 million at the end of the first year, and these savings will grow at the rate of 5 per cent per year indefinitely.

The firm has a debt/equity ratio of 2.0, a cost of equity of 15 per cent, and an after-tax cost of debt of 6 per cent. The cost-saving proposal is closely related to the firms core business, so it is viewed as having the same risks as the overall firm. Under what circumstances should the firm take on the project?

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