Problem:
Scanlin, Inc. is considering a project that will result in initial after-tax cash savings of $1.77 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 11.7 percent, and an after-tax cost of debt of 4.5 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:
Question: What is the maximum initial cost the company would be willing to pay for the project?
Note: Please show how to work it out.