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

ID: 2719763 • 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 $122,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.5 percent per year forever. The project requires an initial investment of $1,450,000.

(a)

If Yurdone requires a return of 15 percent on such undertakings, what is the NPV of the project?

(b)

Should the cemetery business be started? Yes or No

(c)The company is somewhat unsure about the assumption of a growth rate of 5.5 percent its cash flows. At what constant growth rate would the company just break even if it still required a return of 15 percent on its investment?

Minimum Growth Rate_______

If Yurdone requires a return of 15 percent on such undertakings, what is the NPV of the project?

(b)

Should the cemetery business be started? Yes or No

Minimum Growth Rate_______

Explanation / Answer

a)
Present Value of Cash inflow = Cash inflow/(rate - growth rate)
Present value of Cash Inflow = $122,000/(15% - 5.5%) = $1,284,210.53
NPV = Cash out flow - Present value of Cash Inflow
NPV = -$1,450,000 + $1,284,210.53 = -$165,789.47
b) The cementery business should not be started beause NPV is Negative.
c)
Minimimum Growth rate is the rate where NPV is zero.
NPV = Cash out flow - Present value of Cash Inflow
$0 = -$1,450,000 - ($122,000/(15% - g))
$1,450,000 = - $122,000/(15% - g)
solving fo g , we get
Growth rate g = 6.59%
Minimum Growth rate = 6.59%

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

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