Question: Scanlin, Inc., is considering a project that will result in initial after-tax cash savings of $2.7 million at the end of the first year, and

Scanlin, Inc., is considering a project that will result in initial after-tax cash savings of $2.7 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 debtequity ratio of .90, a cost of equity of 13 percent, and an after-tax cost of debt of 4.8 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?

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