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 $116,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.9 percent per year forever. The project requires an initial investment of $1,390,000.

If Yurdone requires a return of 13 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).)

The company is somewhat unsure about the assumption of a growth rate of 5.9 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? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

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 $116,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.9 percent per year forever. The project requires an initial investment of $1,390,000.

Explanation / Answer

Answer a

Present value of cashflows in year 1 = cashflows in year 2/(discount rate - growth rate)

= (116000*105.9%)/(0.13-0.059)

= 1730197

Discount factor for year 1 @13% =0.885

Present value of cashflows today = 1730197*0.885 = 1531224

Out flow =1390000

NPV = 1531224-1390000 = $141224

Answer b since NPV is positive cemetery business should be started.

Answer c

To break even the PV of inflow should be 1390000

disocunt factor for year 1 = 0.885

PV of cash flow in year 1 = 1390000/0.885

= 1570621

Present value of cashflows in year 1 = cashflows in year 2/(discount rate - growth rate)

1570621 = (116000+(116000*growth rate)/(0.13-growth rate)

204180.8-1570621 growth rate = (116000+(116000*growth rate)

-1570621 growth rate-116000 growth rate = 116000-204180.8

-1686621growth rate =-88181

growth rate = 88181/1686621

= 5.23% (approx)

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