(Toolkit – Decision Rules – PBAK, IRR, NPV) NPV Valuation - Yurdone Corp wants t
ID: 2823047 • Letter: #
Question
(Toolkit – Decision Rules – PBAK, IRR, NPV) NPV Valuation - Yurdone Corp wants to set up a cemetary business. CFO Barry M. Deep is optimistic and sees Cash flow of $127,000 in year one and then growth of 4% per year forever. Initial investment will be $1,700,000. If Yurdone requires an 11% return should the business be started? Because Barry really isn't THAT optimistic about 4% growth - at what % growth would the deal still break even on an NPV basis if required return is 11%?
Question 17 options:
Yes, 3.5%
Yes, 4.0%
No, 3.5%
No, 4.0%
Yes, 3.5%
Yes, 4.0%
No, 3.5%
No, 4.0%
Explanation / Answer
Present value of cash flow =CF1/(R-g)
= 127000 / (.11 -.04)
=127000 / .07
= 1814285.71
NPV = Present value -Initial investment
= 1814285.71 - 1700000
= 114285.71
since NPV is positive business should be started .
2)At Breakeven ,NPV is 0such that present value =initial investment
1700000 = 127000/(.11-g)
(.11 -g) = 127000/1700000
(.11-g) = .0747
g = .11-.0747 = .0353 or 3.53%
correct option is "A" - yes and 3.5%
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