(Uncertain cash flow; uncertain discount rate) Quixote Wind Systems manufactures wind-powered electricity generators. The company is considering investing in new technology to allow storage of wind-generated power in batteries. Initial 856 PART VI Decision Making cost of the technology is expected to be $400,000. The investment is expected to increase after-tax cash flows by $68,000 for 11 years. The company uses its 8 percent cost of capital rate to discount cash flows for purposes of capital budgeting.

a. What is the lowest acceptable annual cash flow that would allow this project to be considered acceptable (ignore tax)?

b. Assume the company is uncertain as to its actual cost of capital. What is the maximum the company’s cost of capital could be (rounded to the nearest whole percent) and still allow this project to be considered acceptable (ignore tax)?