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 $118,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 6.1 percent per year forever. The project requires an initial investment of $1,410,000. Required: (a) If Yurdone requires a return of 15 percent on such undertakings, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $ (b) Should the cemetery business be started? (c) The company is somewhat unsure about the assumption of a growth rate of 6.1 percent its cash flows. At what constant growth rate would the company just break even if it still required a return of 15 percent on its investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Minimum growth rate %

Explanation / Answer

Terminal value at year 1= 118000 (1+ .061)/(.15-.061)

                                    = 118000* 1.061 / .089

                                    = 1,406,719

Total cash flow = 1406,719+118000 = 1,524,719

Present value of cash flow =PVF@15%,1 *CF

                            = .869565 * 1524719= $1325842.70

NPV = 1325842.70 - 1410000 = -$84157.30.

No ,NPV is negative business should not be started .

2) At breakeven NPV =0,so Present value of cash flow =Initial investment = 1410000

Present value =(PVF@15%,1*CF) +(PVF@15%,1*Terminal value)

1410000 = (.869565 * 118000) +(.869565 *TV)

1410000 = 102608.6957 = .869565TV

   TV =( 1410000-102608.6957) /.869565

      = 1307391.304 / .869565

         = 1,503,500

Terminal value = CF1(1+g)/(Rs-g)

1503500 = 118000(1+g) /(.15-g)

   1503500 /118000 = (1+g)/ (.15-g)

    12.741525 (.15-g) = 1+g

     1.91123 - 12.741525g = 1+g

      1.91123-1 = 12.741525g +g

       .91123 = 13.741525g

      g = .91123 /13.741525

        = .06631 or 6.631% .

at growth = 6.631% ,company will have NPV =0

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