Ch, Inc., is considering a project that will result in initial aftertax cash savings of $1.71 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The company has a target debt-equity ratio of. 75, a cost of equity of 11.1 percent, and an aftertax cost of debt of 3.9 percent. The cost-saving proposal is somewhat riskier than the usual projects 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:
a) What is the maximum initial cost the company would be willing to pay for the project?
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