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 $93,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5 percent per year forever. The project requires an initial investment of $1,460,000.

What is the NPV for the project if Yurdone's required return is 10 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

If Yurdone requires a return of 10 percent on such undertakings, should the firm accept or reject the project?

The company is somewhat unsure about the assumption of a growth rate of 5 percent 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

What is the NPV for the project if Yurdone's required return is 10 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

a) Present value of future cash flows= $ 93,000/1.1+93,000*(1.05)/1.1^2+93,000*(1.05)^2/1.1^3+.....

Present value of future cash flows=  $ (93,000/1.1)*(1+(1.05)/1.1+(1.05)^2/1.1^2+.....)

Present value of future cash flows=  $(93,000/1.1)*(1/(1-1.05/1.1))

Present value of future cash flows=  $(93,000/1.1)*(1.1/(1.1-1.05)) =  $(93,000/(1.1-1.05))

Present value of future cash flows= $(93,000/.05)=$ 1,860,000

NPV for the project=- initial investment + Present value of future cash flows

NPV for the project=-1,460,000 + 1,860,000

NPV for the project=$ 400,000.00

b)Since the NPV of the project>0 therefore there is net addition of wealth thus the project should be Accept.

c)At break even,NPV=0 =>

Present value of future cash flows=initial investment

=>  $(93,000/(0.10-g))=$1,460,000

=> 0.10-g=93,000/1,460,000

=>g=0.10-(93,000/1,460,000)

=>g=0.10-0.063698

=>g=0.036302

=>g=0.0363=3.63%

Thus   Constant growth rate = 3.63%

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