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 $91,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 3 percent per year forever. The project requires an initial investment of $1,440,000.

What is the NPV for the project if Yurdone's required return is 12 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 12 percent on such undertakings, should the firm accept or reject the project?

The company is somewhat unsure about the assumption of a 3 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 12 percent on investment? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the NPV for the project if Yurdone's required return is 12 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))

Explanation / Answer

Value of future cash flows is

91000 / ( 0.12 - 0.03 ) = 1011111.11

1a) NPV is 1,011,111.11 - 1,440,000 = -428,888.88

2a) As NOV is -ve the project should be rejected

2b) For breakeven

91000 / ( 0.12 - x ) = 1440000

0.12 - x = 91000 / 1440000 = 0.06319

x = 0.12 - 0.06319 = 0.0568

Hence 5.68% is required to break even

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