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 $102,000 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 $1,550,000.

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 final 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 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? (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)

NPV = - PV of Cash Outflow + PV of cash inflow

             PV cash inflows= (cash inflows/required return-growth rate)

  NPV = -1,550,000 + (102,000/(10%-5%)

  NPV = $ 490,000

a-2 )

Accept, as there is positive NPV.

b.)    Constant growth rate = Required Return - Annual Cash Inflow/Initial Investment

  Constant growth rate = 0.10 – 102,000/1,550,000

  Constant growth rate = 0.0342 or 3.42%

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