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 $97,000 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 $1,500,000.

What is the NPV for the project if Yurdone's required return is 11 percent

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 $97,000 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 $1,500,000.

Explanation / Answer

Here the cash inflows for a fixed period is not given, hence it is perpetuity. Unlike ordinary perpetuity cash flows, the cash flows here grow at a constant rate forever, which is a growing perpetuity.

Since it is perpetual cash flow and it is also a growing perpetuity, first we have to find the present value of future cash flows:

PV of cash inflows = C1/(R

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