Question
3. Rambler Corp is considering a cost savings initiative that is expected to yield after-tax savings of $3 million in year one. These savings are
3. Rambler Corp is considering a cost savings initiative that is expected to yield after-tax savings of $3 million in year one. These savings are expected to grow by 2% per year indefinitely. The company has a WACC of 12%.
a. If the cost to implement the initiative is $35 million, should the company pursue it?
b. What if the cost savings proposal is considered to be less risky than the risk of the business overall and, for less risky projects, the firm applies a subjective adjustment factor of -3% to its cost of capital. Now should the company pursue the initiative?
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