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 $60,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4.5 percent per year forever. The project requires an initial investment of $694,000.

If Yurdone requires a 12.5 percent return on such undertakings, the NPV of the project is $ (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)) and the cemetery business (Click to select)shouldshould not be started.

The company is somewhat unsure about the assumption of a 4.5 percent growth rate in its cash flows. The company would just break even at a constant growth rate of percent (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)) if it still required a 12.5 percent return on investment.

Explanation / Answer

since the cashflow will come in forever, to compute the PV of cash flow we will use the formula of perpetual annuity with growth:

the formula is PV = CF1/ RR- g

where CF1 = cashflow at the end of year 1, RR = req. rate of re turn g = growth rate.

so PV = 60000/( .125-.045)

= 60000/.08 = 750000

NPV = PV - INITIAL COST

= 750000-694000 = 56000

NPV is positive so we should start the project

case 2: to break even we will find the growth rate taking PV = 694000

PV = CF1/ RR- g

rr-g = CF1/PV

g = RR - CF1/PV

g = .125 - 60000/694000

g = .125 - .0865 = .0385

therefore The company would just break even at a constant growth rate of= 3.85%

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