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 $95,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of $1,480,000.

What is the NPV for the project if Yurdone's required return is 11 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.)

If Yurdone requires a return of 11 percent on such undertakings, should the firm accept or reject the project?

The company is somewhat unsure about the assumption of a 4 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 11 percent on investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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 $95,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of $1,480,000.

Explanation / Answer

a-1 )Present value of cash flow = cash flow of first year / (required return -growth)

                                             = 95,000 / (.11 -.04)

                                             = 95,000 / .07

                                             =$ 1,357,142.86

NPV = present value of cash flow -initial investment

        = 1,357,142.86 - 1,480,000.

       = - 122,857.14

a-2)The project should not be accepted as NPV is negative .

2)In order to break even ,Present value of cash flow =Initial investment.

So present value of cash flow must be equal to 1,480,000

Growth = Required return - (cash flow of first year / present value )

           = .11 - (95,000 / 1,480,000)

          = .11 - .0.0642

         = .0458 or 4.58%

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