11 The Yurdone Corporation wants to set up a private cemetery business. Accordin

Question

11

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 $104,000 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 $1,570,000.

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 and round your final answers to 2 decimal places. (e.g., 32.16))

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))

Explanation / Answer

a-1 As a result, the cemetery project will provide a net cash inflow of $104,000 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 $1,570,000.

NPV = -1,570,000 +104,000/(12%-3%)= -$414,444.44

a-2

Reject

b. for breakeven, NPV=0

-1,570,000 +104,000/(12%-g)=0

g= 5.38%

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