Question
Chrysler Motors is considering building a small electric generating plant to service a stamping & assembly plants in Sterling Heights, MI. Currently, both plants consume
Chrysler Motors is considering building a small electric generating plant to service a stamping & assembly plants in Sterling Heights, MI. Currently, both plants consume significant amounts of electricity which Chrysler purchases from the local utility Detroit Edison. The initial capital cost of the small generating plant is estimated to be $10 mil. Once installed, the estimated annual savings compared to purchasing electricity from Detroit Edison will be $1,008,000 per year assumed to be in perpetuity. Chryslers beta = 1.2; Detroit Edisons beta = 0.8. The risk free rate = 4% and the market risk premium = 5.5%. Chrysler has significant cash levels and plans to finance the investment from retained earnings. Should Chrysler do the project? Explain.
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