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 $87,900 for the firm during the first year, and the cash flows are projected to grow at a rate of 5 percent per year forever. The project requires an initial investment of $1,400,000.

What is the NPV for the project if Yurdone's required return is 10 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

If Yurdone requires a return of 10 percent on such undertakings, should the firm accept or reject the project?

The company is somewhat unsure about the assumption of a 5 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 10 percent on investment? (Do not round intermediate calculations. Enter your answer as a percent rounded 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 $87,900 for the firm during the first year, and the cash flows are projected to grow at a rate of 5 percent per year forever. The project requires an initial investment of $1,400,000.

What is the NPV for the project if Yurdone's required return is 10 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

If Yurdone requires a return of 10 percent on such undertakings, should the firm accept or reject the project?

The company is somewhat unsure about the assumption of a 5 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 10 percent on investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

The present value of a growing Perpetuiis given by the formula

C/(r-g)

Here r = 0.10

g= 0.05

C = 87,900

Hence Present Value = 87.900/(0.10-0.05) = 1,758,000

Net present Value = 1,758,000 - 1,400,000 = 358,000

Since NPV is positive at required rate of 10%, the firm should undertake the project.

Part - B: TO calculate growth rate for break even

using the same formula and equating it to inital outflow,

1,400,000 = 87,900/(0.10-g)

Now g works out to be 3.72%

hecne break even growth rate is 3.72%

n

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