Carson Electronics uses 70 percent common stock and 30 percent debt to finance i

Question

Carson Electronics uses 70 percent common stock and 30 percent debt to finance its operations. The aftertax cost of debt is 5.4 percent and the cost of equity is 15.4 percent. Management is considering a project that will produce a cash inflow of $36,000 in the first year. The cash inflows will then grow at 3 percent per year forever. What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project?

$299,032

$382,979

$411,406

$434,086

$441,414

Explanation / Answer

299,032 has to be the maximum amount the firm can initially invest in this project, since after that all values give negative cash flows.

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