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Initial Investment

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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 12.0%, 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?

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Solution Summary

The solution explains how to calculate the amount of initial investment given the cash flows and required rate of return.

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The most it should pay is the present value of the earnings. The earnings are a perpetuity and the present value of ...

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