A firm is considering a project that will generate perpetual

A firm is considering a project that will generate perpetual cash flows of $50,000 per year beginning next year. The project has the same risk as the firm\'s overall operations. If the firm\'s WACC is 12%, and its debt-to-equity ratio is 1.33, what is the most it could pay for the project and still earn its required rate of return?

A: $313,283

B: $375,094

C: $416,667

D: $554,167

Solution

It has a cost of capital of 12 %

Cash inflows starting next year =50,000

In order to provide for cost of capital ,it can pay upto 554167$.