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

ID: 2705532 • Letter: 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 $107,000 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 $1,600,000.

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))

Explanation / Answer

CF1 = 107000, r = required return =12%, g = growth rate = 3%
PV_CF = CF1 / (r - g)
PV_CF =107000 / (12 - 3)% = 1,188,888.89
Co = -1,600,000

Net present value = Co + PV_CF

=> -1,600,000 + 1,188,888.89 = -41,111.11

As NPV<0, Project shall be REJECTED

Break even when PV_CF = Investment = 1,600,000
PV_CF = 107,000 / (0.12 - g)
107,000 / (0.12 - g) = 1,600,000
0.12 - g = 107000/1600000

g = .053125 = 5.31%

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

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