Question
WACC and NPV. Lucknow Tours Ltd is considering a project that will result in initial aftertax cash savings of $4.3 million at the end of
WACC and NPV.
Lucknow Tours Ltd is considering a project that will result in initial aftertax cash savings of $4.3 million at the end of the first year, and these savings will grow at a rate of 1.9% per year indefinitely. The firm has a target debtequity ratio of 0.40, a cost of equity of 10.8% and an aftertax cost of debt of 3.2%. The costsaving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2% to the cost of capital for such risky projects (assume a classical tax system). Under what circumstances should Lucknow take on the project?
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