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 $93,000 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 $1,460,000. a-1 What is the NPV for the project if Yurdone's required return is 10 percent? b.The company is somewhat unsure about the assumption of a growth rate of 5 percent 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?

Explanation / Answer

Ans;

(a)

Since Net Present Value (NPV) of the project is positive,  the firm should accept the project.

(b) At break even Preesent Value of Cash Inflows is equal to Present Value of Outflows.

At 3.63% constant growth rate the company would just break even if it still required a return of 10 percent on investment.

Net Cash Inflow Year1 (CF1) 93000 Growth Rate (g) 5% Required Return (RR) 10% Present Value of Cash Inflows CF1/(RR-g): 93000/(0.10-0.05) 1860000 Present Value of Cash Inflows 1860000 Less: Initial Investment (Cash Outflow) -1460000 Net Present Value of Project 400000

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