ACME, Inc. is considering a project that will result in initial after-tax cash savings of $3.5 million
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Question:
ACME, 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 4% per year indefinitely. The firm has a target debt-equity ratio of 0.55, cost of equity of 13%, and after-tax cost of debt of 5.5%. 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 +2% to the cost of capital for such risky projects. Under these circumstances, what is the maximum investment size for ACME to accept the project?
I know that the first step is to compute WACC and I have done that, but its pretty unclear what to do later..
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