The Yurdone Corporation wants to set up a private cemetery business. According t
ID: 2705534 • 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))
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.
Explanation / Answer
Present value of perpetuity growing at 5% and discounted at 10% is
PV = Amount / (r - g)
Amount = 107000, r = discount rate =10%, g = growth rate 5%
PV =107000 / (10 - 5)% = 2140000
Net present value = -1,600,000 + 2140000 = 540000
Break even when Present value = Investment = 1,600,000
PV = 1,600,000 = 107,000 / (0.1 - g)
g = 0.1 -107,000 / 1600000 = 0.033125 or 3.3125%
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