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 $119,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 6.2 percent per year forever. The project requires an initial investment of $1,420,000.

Required: (a) 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 (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 6.2 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 (e.g., 32.16).) Minimum growth rate % ReferenceseBook & Resources

Explanation / Answer

NPV = -initial investment+year1 CF/(required rate-growth rate)

NPV = -1420000+119000/(.12-.062)

NPV = 631724.14

Yes it should be started as NPV is positive

NPV = -initial investment+year1 CF/(required rate- minimum growth rate)

0 = -1420000+119000/(.12-minimum growth rate)

minimum growth rate = 20.38%

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