Determine maximum initial cost the company


Problem:

Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of 0.75, a cost of equity of 11.4 percent, and an aftertax cost of debt of 4.2 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 2 percent to the cost of capital for such risky projects.

Required:

What is the maximum initial cost the company would be willing to pay for the project?

Note: Please show how you came up with the solution.

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Finance Basics: Determine maximum initial cost the company
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