The Yurdone Corporation wants to set up a private cemetery business. According t
ID: 2776249 • 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 $107,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 3 percent per year forever. The project requires an initial investment of $1,600,000.
What is the NPV for the project if Yurdone's required return is 12 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).)
If Yurdone requires a return of 12 percent on such undertakings, should the firm accept or reject the project?
The company is somewhat unsure about the assumption of a growth rate of 3 percent in its cash flows. At what constant growth rate would the company just break even if it still required a return of 12 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 $107,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 3 percent per year forever. The project requires an initial investment of $1,600,000.
Explanation / Answer
a-1 )Initial investment - $ 1,600,000
present value of cash Inflow = (cash flow of 1year * PVF@12%,1) +(Terminal value *PVF@12%.1)
= (107,000 * .89286 ) +(1,224,555.56 * .89286)
= 95536.02 + 1093356.68
= $ 1,188,892.70
NPV =present value -II
= 1,188,892.7 - 1,600,000
= $ - 411,107.30
**Terminal value = 107,000 ( 1+ .03) / (.12 - .03)
= 107,000 * 1.03 / .09
= 110,210 / .09
= $ 1,224,555.56
A-2)No project should not be undertaken as NPV is negative
b)At Breake even ,present value of cash inflow will be equal to initial investment = 1,600,000
present value of cash Inflow = (cash flow of 1year * PVF@12%,1) +(Terminal value *PVF@12%.1)
1,600,000 = (107,000 * .89286 ) +(terminal value * .89286)
1,600,000 = 95536.02 + (TV * .89286)
TV = (1600000 -95536.02 ) / .89286
= 1504463.98 / .89286
= 1684994.27
Terminal value =CF1 (1+g) /(rate -g)
1684994.27 = 107000 (1+g) /(.12 -g)
1684994.27 (.12 - g ) = 107000 (1+g)
202199.31 - 1684994.27g = 107000 + 107000g
202199.31 -107000 = 1684994.27g + 107000g
95199.31 = 1577994.27g
g = 95199.31 /1577994.27
=.0603 or 6.03%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.