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 $103,000 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 $1,560,000.

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 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 10 percent on investment?

Explanation / Answer

NPV= - initial investment +Cash flow year 1/( required rate of return - growth rate)

= -1560000 + 103000/(0.10 - 0.04) = 156666.67

Minimum growth rate to break even :

initial investment = Cash flow year 1/( required rate of return - growth rate)

1560000 = 103000/(0.1 - growth rate)

growth rate = 3.397%

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