This problem is useful for testing the ability of financial calculators and comp
ID: 2701909 • Letter: T
Question
This problem is useful for testing the ability of financial calculators and computer software. Consider the above cash flows. The IRRs, from smallest to largest, are _________percent, __________ percent, ___________percent, and ________ percent. (Hint: search between 20 percent and 70 percent.
II
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 $96,000 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 $1,490,000.
What is the NPV for the project if Yurdone's required return is 10 percent?
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?
Year Cash Flow 03,024 1 17,172 2
36,420 3 34,200 4
12,000
Explanation / Answer
a.)PV of cash flows=C1/(R-g)=$96,000/(0.1-0.05)=$1920000
NPV of project= - $1490000 + $1920000=$430,000
b.)0=- $1490000 + $96,000/(0.1-g)
So g=0.0356
g=3.56%
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