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 $96,000 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 $1,490,000.

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 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 5 percent growth rate 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 answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

a-1 )Present value of cash Inflows = cash flow of first year /(Discount rate - growth)

                                                 = 96,000 / (.10-.05)

                                                 = 96,000 / .05

                                                 = $ 1,920,000

NPV =Present value -Initial investment

       = 1,920,000 - 1,490,000

       = $ 430,000

a-2)yes ,The firm should accept the offer as NPV is positive.

b)At break even ,Present value of cash flow should be equal to initial investment = 1,490,000

Present value of cash flow = cash flow of first year /(discount rate -growth)

   1,490,000 =   96,000 / (.10 -g)

(.10 -g) = 96,000 / 1,490,000

.10 - g= .0644

g= .10 - .0644

   = .0356 or 3.56 %

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