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 $124,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.7 percent per year forever. The project requires an initial investment of $1, 470,000. Required: If Yurdone requires a return of 13 percent on such undertakings, what is the NPV of the project? Should the cemetery business be started? (c) The company is somewhat unsure about the assumption of a growth rate of 5.7 percent its cash flows. At what constant growth rate would the company just break even if it still required a return of 13 percent on its investment?

Explanation / Answer

a)

Compute the NPV of the project:

PV of growing indefinite period = CF1 / r-g

= $124,000 / 0.13-0.057

= $1,698,630

Now,

NPV = $1,698,630-$1,470,000

= $228,630

b)

Yes, as the NPV is positive, it is suggested to start the cemetery business.

c)

Calculate the minimum growth rate:

The break even growth rate is calculated as follows.

Let g be the growth rate.

$1,470,000 = $124,000 / 0.13-g

= $191,100 -1,470,000 g = $124,000

g= $67,100 / $1,470,000

= 4.56% (rounded)

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