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 $98,000 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 $1,510,000.

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 3 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 12 percent on investment? (Round your answer 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 $98,000 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 $1,510,000.

Explanation / Answer

1. NPV of the project = 98,000 / (0.12 - 0.03) - 1,510,000 = -$421,111.11

2. The firm should REJECT the project at 12% required rate of return since at 12% NPV is negative.

3. Let the required growth rate be x
0(NPV) = 98,000 / (0.12 - X) - 1,510,000
X = 5.5%
Thus, the required growth rate is 5.5%

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