Suppose you have just become the president of Costco and the first decision you face is whether to go ahead with a plan to renovate the company's warehouse distribution system. The plan will cost the company $50 million, and it is expected to save $12 million per year after taxes over the next six years. Costco’s capital structure is 90% in debt and 10% in equity. Costco’s beta is 0.89. Costco’s tax rate is 35%. Market’s return is 11% and risk-free rate is 3.5%. Yield to maturity of Costco’s bonds is 6.8%. Do you take on the renovation project?
