Och, Inc., is considering a project that will result in initial aftertax cash savings of $3.5 million

Question:

Och, Inc., is considering a project that will result in initial aftertax cash savings of $3.5 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 debt–equity ratio of .55, a of 13 percent, and an aftertax of 5.5 percent. 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 12 per cent to the for such risky projects. Under what circumstances should Och take on the project?

Cost Of Capital
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