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 $99,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5 percent per year forever. The project requires an initial investment of $1,520,000.

What is the NPV for the project if Yurdone's required return is 10 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 10 percent on such undertakings, should the firm accept or reject the project?

The company is somewhat unsure about the assumption of a 5 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 10 percent on investment? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the NPV for the project if Yurdone's required return is 10 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))

Explanation / Answer

a) rate of return=10%

NPV = -1,520,000+99,000/(1+10%)+99,000*(1+5%)/(1+10%)^2+99,000*(1+5%)^2/(1+10%)^3 +............... =-1,520,000+99,000/1.1+99,000*1.05/1.1^2+99,000*1.05^2/1.1^3+............

Multiplying both sides by 1.05,

1.05 NPV= -1,520,000*1.05 + 99,000*(1.05/1.1)+99,000*(1.05/1.1)^2+99,000*(1.05/1.1)^3+............

= -1,520,000*1.05 + 99,000/1.047619+99,000/1.047619^2+99,000/1.047619^3+...........

=-1,596,000+99,000(1.047619-1)=-1,596,000+2,079,000=483,000

So, NPV=483,000/1.05=$460,000

a-1

Let rate of return be r%

1.05 NPV=-1,520,000*1.05 + 99,000*(1.05/(1+r%))+99,000*(1.05/(1+r%))^2+99,000*(1.05/(1+r%))^3+............

At IRR, NPV=0

-1,520,000*1.05 + 99,000*(1.05/(1+r%))+99,000*(1.05/(1+r%))^2+99,000*(1.05/(1+r%))^3+............=0

99,000*(1.05/(1+r%))+99,000*(1.05/(1+r%))^2+99,000*(1.05/(1+r%))^3+...........=1,596,000

99,000/((1+r%)/1.05-1)=1,596,000

(1+r%)/1.05-1=0.062030

(1+r%)/1.05=1.062030

1+r%=1.1151

r%=11.51% which is greater than required rate of return

Also, using Excel, we can calculate IRR

Since IRR is greater than the required rate of return project should be accepted

b) NPV=0 for breakeven

Let growth rate be g%

(1+g)NPV=-1,520,000*(1+g) + 99,000*((1+g)/(1.1))+99,000*((1+g)/(1.1))^2+99,000*((1+g)/(1.1))^3+............

At IRR, NPV=0

-1,520,000*(1+g) + 99,000*((1+g)/(1.1))+99,000*((1+g)/(1.1))^2+99,000*((1+g)/(1.1))^3+............=0

99,000*((1+g)/(1.1))+99,000*((1+g)/(1.1))^2+99,000*((1+g)/(1.1))^3+...........=1,520,000*(1+g)

99,000/((1.1/(1+g)-1)=1,520,000*(1+g)

(1.1/(1+g) -1 )*(1+g)=0.065132

1.1-1-g=0.065132

.1-g=0.065132

g=.1-065132=0.03487

g=3.487%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.