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Risky Projects Taken Up By Companies

Question

Photosynthesis, Inc. is considering a project that will result in initial after-tax cash savings of $2 million at the end of the first year, and these savings will grow at a rate of 6% per year indefinitely. The firm has a target debt-equity ratio of 1.5, a cost of equity of 20%, and an after-tax cost of debt of 7%. 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 +10% to the cost of capital for such risky projects. Under what circumstances should Photosynthesis take on the project?  

Summary

The question belongs to Finance and it discusses about a company which is contemplating about taking up a project. The solution discusses whether or not the project should be taken up by the company or not.

Total Word Count 157

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