The Yurdone Corporation wants to set up a private cemetery business. According t

Question

The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up". As a result, the cemetery project will provide a net cash inflow of $103,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of $1,560,000.

What is the NPV for the project if Yurdone's required return is 10 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

If Yurdone requires a return of 10 percent on such undertakings, should the firm accept or reject the project?

The company is somewhat unsure about the assumption of a 4 percent growth rate in its cash flows. At what constant growth rate would the company just break even if it still required a return of 10 percent on investment? (Round your answer to 2 decimal places. (e.g., 32.16))

The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up". As a result, the cemetery project will provide a net cash inflow of $103,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of $1,560,000.

Explanation / Answer

a.1. NPV = next year cashflow / (required return - growth rate) - initial cost = 103,000 / (10%-4%) - 1,560,000 = 156,666.67

a.2. As the NPV is positive, the firm should accept the project.

b. Let breakeven growth rate = r%

At this breakeven growth rate r, the NPV = 0

So 103,000 / (10%-r) - 1,560,000 = 0

Solving, we get r = breakeven constant growth rate = 3.40%

Hope this helped ! Let me know in case of any queries.

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