ABC is a competitor to TNN

and TNN is considering a project that will result in initial after tax cash savings of RM9 million at the end of the first year, and these savings will grow at a rate of 5 percent per year indefinitely. The firm has a target debt/equity ratio of 0.75, a cost of equity of 22 percent, and after-tax cost of debt of 10 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes. Therefore, the management decides to use the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. Under what circumstances should TNN take

the project?

Hint: Calculate the cost of the project and your recommendation is based on this cost.