Question: WACC and NPV stranger Inc., is considering a project that will result in initial after tax cash savings of $3.5 million at the end of

WACC and NPV stranger Inc., is considering a project that will result in initial after tax cash savings of $3.5 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .70, a cost of equity of 13 percent, and an after tax cost of debt of 5.5 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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Using the debtequity ratio to calculate the WACC we find WACC 70170 055 1170 13 0... View full answer

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