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 $90,000 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 $1,430,000.

a-1 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.)

NPV $ ----------------

a-2 If Yurdone requires a return of 10 percent on such undertakings, should the firm accept or reject the project?

Accept Reject

b. 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.)

Constant growth rate %-------------

Explanation / Answer

a - 1 Calculation of Net present value Years Particulars Cash flow Present value factor at 10 % Present value amount ( Present value discount factor * Cash flow ) 0 Initial cost of the Investment -1430000 1 -1430000 1 Cash Inflow 90000 0.909090909 81818.18182 1 Terminal value ( Note - 1 ) 1890000 0.909090909 1718181.818 Net present value 370000 Note - 1 Terminal value at the end of the year = 90000 + Growth rate / required return - Growth rate 90000 + 5 % / 10 % - 5% 94500 / 5 % 1890000 a - 2 Since the net present value is positive Yourdon should accept the project. b At 3.71 % growth rate the net present value will break be even Calculation of Net present value Years Particulars Cash flow Present value factor at 10 % Present value amount ( Present value discount factor * Cash flow ) 0 Initial cost of the Investment -1430000 1 -1430000 1 Cash Inflow 90000 0.909090909 81818.18182 1 Terminal value ( Note - 1 ) 1483942 0.909090909 1349038.182 Net present value 856.3636364 The balance amount is due to rounding off. Note - 1 Terminal value at the end of the year = 90000 + Growth rate / required return - Growth rate 90000 + 3.71 % / 10 % - 3.71 % 93340 / 6.29 % 1483942

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