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 $125,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.8 percent per year forever. The project requires an initial investment of $1,480,000. Required: (a) If Yurdone requires a return of 14 percent on such undertakings, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $ (b) Should the cemetery business be started? (c) The company is somewhat unsure about the assumption of a growth rate of 5.8 percent its cash flows. At what constant growth rate would the company just break even if it still required a return of 14 percent on its investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Minimum growth rate %

Explanation / Answer

a)

Present value of net cash inflows:

= $125,000÷(14%-5.8%)

= $1,524,390.24

Net present value:

= $1,524,390.24-$1,480,000

= $44,390.24

b)

NPV is positive, business should be started.

c)

NPV = $0 for required condition and say growth rate is X

$0 = $125,000÷(14%-X)-$1,480,000

14%-X = $125,000/$1,480,000

Growth rate X = 5.55%

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