Davidson Consulting believes that they can help your company reduce production c

Question

Davidson Consulting believes that they can help your company reduce production costs in exchange for a one-time fee. You estimate that, if you hire the consulting firm, the cost savings will be $1.81 million after-taxes at the end of the first year, and these cost savings will grow at a rate of 1.00 percent per year indefinitely. Your company estimates the cost of capital on this project as 11.01 percent.

What is the most that you would pay Davidson Consulting for this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole dollar amount.)

Maximum cost $=?

Explanation / Answer

Maximum cost = Cost saving x (1+growth rate) /(Cost of capital - growth rate)

Maximum cost = $1810,000 x (1+ 1%) /(11.01% - 1%)

Maximum cost = $18,262,737

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