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 $101,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 3 percent per year forever. The project requires an initial investment of $1,540,000.

What is the NPV for the project if Yurdone's required return is 12 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

If Yurdone requires a return of 12 percent on such undertakings, should the firm accept or reject the project?

The company is somewhat unsure about the assumption of a 3 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 12 percent on investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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 $101,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 3 percent per year forever. The project requires an initial investment of $1,540,000.

Explanation / Answer

a-1) Cash inflow for year 1 = 101000

Cash inflow for year 2 = 101000 + 3% = $104030

Value of project at the end of Year 1 = Cash inflow for year 2 / Required rate of return - growth rate

   = 104030 / 0.12 - 0.03

= 104030 / 0.09

   = $ 1155888.88888

P.V. of cash inflow = [101000 + 1155888.88888 ] * Present value factor for first year @ 12 %

= 1256888.88888 * 0.89286

   = $ 1122225.81 (approx)

P.V. of cash outflow = $ 1540000 (Given)

The NPV of project = P.V. of cash inflow - P.V. of cash outflow

   = 1122225.81 - 1540000

= (-) $ 417774.19 (approx)

Conclusion:-The NPV of Project is (-) 417774.19.

a-2) The project should not be accepted as the NPV of the project is negative.

b) At Break even point,

Present value of Cash inflow = Present value of Cash outflow

Let G be the growth rate.

[101000 + {101000 + G/100 * 101000} / 0.12 - 0.0G ] * Present value factor for first year @ 12 % = 1540000

[101000 (0.12 - 0.0G) + 101000 + 1010G ] * 0.89286 = 1540000 (0.12 - 0.0G)

[12120 - 1010G + 101000 + 1010G] * 0.89286 = 184800 - 15400G

113120 * 0.89286 = 184800 - 15400G

15400 G = 184800 - 101000.32

G = 83799.68 / 15400 = 5.44 % (approx)

Conclusion:- The company would breakeven at growth rate of 5.44 % if if still required return of 12 % on the investment.

  Summary:-

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