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 $94,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 3 percent per year forever. The project requires an initial investment of $1,470,000.

What is the NPV for the project if Yurdone's required return is 12 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.)

    I need to know how to get the answer for b as well.

The company is somewhat unsure about the assumption of a 3 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 12 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 12 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

Part - A

The net present value of a growing perpetuity is given by C/(r-g) - inital investment where C =94,000, r= 0.12 and g =0.03

Therefore NPV = 94,000/(0.12-0.03) -1,470,000

Therefore NPV = -425,555.56

Your Answer is correct

Part - B

Breakeven growth rate :

C/(r-g) = Inital investment

94,000/(0.12-g) = 1,470,000

Now, we need to calcuate g

Thhere g = 0.05605

Expressed as percentage, the constant grwoth rate break even is 5.605%

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