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 $131,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 6.4 percent per year forever. The project requires an initial investment of $1,540,000.

If Yurdone requires a return of 12 percent on such undertakings, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places

Should the cemetery business be started?

The company is somewhat unsure about the assumption of a growth rate of 6.4 percent its cash flows. At what constant growth rate would the company just break even if it still required a return of 12 percent on its investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places

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 $131,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 6.4 percent per year forever. The project requires an initial investment of $1,540,000.

If Yurdone requires a return of 12 percent on such undertakings, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places

Should the cemetery business be started?

The company is somewhat unsure about the assumption of a growth rate of 6.4 percent its cash flows. At what constant growth rate would the company just break even if it still required a return of 12 percent on its investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places

Explanation / Answer

Terminal value at year 1= 131000 (1+ .064)/(.12-.064)

                                    = 131000* 1.064 / .056

                                    = 2489000

Total cash flow = 2489000+131000 = 2620000

Present value of cash flow =PVF@12%,1 *CF

                            = .89286 * 2620000 = $ 2339285.71

NPV = 2339285.71 - 1540000 = $ 799285.71

Yes ,NPV is positive business should be started .

2) At breakeven NPV =0,so Present value of cash flow =Initial investment = 1540000

Present value =(PVF@12%,1*CF) +(PVF@12%,1*Terminal value)

1540000 = (.89286 * 131000) +(.89286 *TV)

1540000 = 116964.29 = .89286TV

   TV =( 1540000-116964.29) /.89286

      = 1423035.71 / .89286

         = 1593794.90

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

1593794.90 = 131000(1+g) /(.12-g)

   1593794.9 /131000 = (1+g)/ (.12-g)

    12.1664 (.12-g) = 1+g

     1.46 - 12.1664g = 1+g

      1.46-1 = 12.1664g +g

       .46 = 13.1664g

      g = .46 /13.1664

        = .0349 or 3.49% .

at growth = 3.49% ,company will have NPV =0

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