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 $89,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of $1,420,000.

What is the NPV for the project if Yurdone's required return is 11 percent?
If Yurdone requires a return of 11 percent on such undertakings, should the firm accept or reject the project?
The company is somewhat unsure about the assumption of a 4 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 11 percent on investment?

What is the NPV for the project if Yurdone's required return is 11 percent?
If Yurdone requires a return of 11 percent on such undertakings, should the firm accept or reject the project?
The company is somewhat unsure about the assumption of a 4 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 11 percent on investment?

Explanation / Answer

0=-$1,420,000+89,000 / (0.11-g)

1,420,000 x0.11-1,420,000g =89,000

(156200-89,000) /1,420,000=g

G=0.0473 =4.73%

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