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

PV of cash inflow =C1/(R-g)

= 89,000 /(0.11-0.04)= 1271428.57

=-$1,420,000 +1271428.57=-148571.43

The NPV IS NEGATIVE ,SO WE WOULD REJECR THE PROJECT

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