According to the CFO, Barry M. Deep, business is \"looking up\". As a result, th

Question

According to the CFO, Barry M. Deep, business is "looking up". As a result, the cemetery project will provide a net cash inflow of $57,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $759,000. The firm requires a 14 percent return on such undertakings. The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what constant rate of growth would the company just break even?

Explanation / Answer

let Constant rate of growth be g

for break even , initial investment = Future discounted cash inflow

so as net cash inflow(CF) of $57,000 for the firm during the first year and it would be growing by g

so discounted value = CF/r-g

here r= 14% =0.14 (given) , CF = $57000

so 57000/(0.14-g) = 759000

=> solving forg, we get g=0.0649=6.49%

so growth rate for break even =6.49%

ans:6.49%

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