Question: Sallinger, Inc., is considering a project that will result in initial aftertax cash savings of $4 million at the end of the first year, and

Sallinger, Inc., is considering a project that will result in initial
aftertax cash savings of $4 million at the end of the first year, and these savings
will grow at a rate of 5 percent per year indefinitely. The firm has a target
debt-equity ratio of .75, a cost of equity of 16 percent, and an aftertax cost of
debt of 6 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. At what level of project costs (investment costs) the Sallinger' project would have
a zero NPV?

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