value: 12.50 points Problem 9-25 NPV Valuation [L01] The Yurdone Corporation wan
ID: 2778867 • Letter: V
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value: 12.50 points Problem 9-25 NPV Valuation [L01] 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 $100,000 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 $1,530,000 a-1 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.) NPV a-2 If Yurdone requires a return of 11 percent on such undertakings, should the firm accept or reject the project? O Reject O Accept b. 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.) Constant growth rateExplanation / Answer
ANSWER A-1
CASH INFLOW=[(100000+4%) / (11%-4%) ] * (1/1.11)
=> (104000/7%) *0.9009
=> $1338480
NPV = CASH INFLOW - CASH OUTFLOW
=> 1338480-1530000
NPV = > (-191520)
ANSWER A-2
NO, YUORDONE SHOULD NOT ACCEPT ie REJECT THE PROJECT AT 11% RETURN AS IT GIVES NEGATIVE NPV.
ANSWER b
TO ACHIEVE BREAK EVEN = CASH INFLOW = CASH OUTFLOW
1530000 = [ (100000+g) / (11%-g) ] (1/1.11)
G= 5.11% (approx)
CONSTANT GROWTH RATE TO ACHIEVE BREAKEVEN IS 5.11%.(approx)
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