The Vurdone Corporation wants to set up a private cemetery business. According t

Question

The Vurdone 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 $92,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of S1,450,000. What is the NPV for the project if Yurdone's required return is 11 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 11 percent on such undertakings, should the firm accept or reject the project? The company is somewhat unsure about the assumption of a 4 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 11 percent on investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g. , 32. 16. )

Explanation / Answer

The current of investment of USD 1,450,000 When annual net income, USD 92,000 Present Value of future Net Income = Net Income in Year 1 / (required return - Growth rate) = USD 92,000 / (11%-4%) = USD 1,314,286 NPV of the investment = Current investment - Present Value of future net income = 1450000-1314286 = -ve USD 135714.3 As the NPV is negative, the company should reject the project To break even, present value of future net income should be equal to current investment which is USD 1450000 Present Value of future Net Income = USD 1450000 Present Value of future Net Income = Net Income in Year 1 / (required return - Growth rate) 1450000= (92,000)/(11%-growth rate) 11%-g =(92,000/1450000) 11%-g = 6.3448% g = 11%-6.3448% = 4.66%

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