The flow-to-equity approach has been used by the firm to value their capital budgeting projects. The total investment cost at time 0 is $640,000. The company uses the flow-to-equity approach because they maintain a target debt to value ratio over project lives. The company has a debt to equity ratio of 0.5. The present value of the project including debt financing is $810,994. What is the relevant initial investment cost to use in determining the value of the project?

D/E = .5/1 D + E = 1.5 D/E = .5 D/V = .5/1.5 = .33 $Debt Financing = .33($810,994) = $267,628 Initial Investment for Equity Valuation = $640,000 - $267,628 = $372,372