1. 20.

WACC and NPV [LO 14.3, 14.5] Warragul Fisheries Limited is considering a project that will result in initial after-tax cash savings of

$2.3 million at the end of the first year, and these savings will grow at a rate of 2 per cent per year indefinitely. The firm has a target debt-toequity ratio of 0.60, a cost of equity of 10 per cent and an after-tax cost of debt of 4.6 per cent. 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 +3 per cent to the cost of capital for such risky projects. Under what circumstances should the company take on the project?