The Yurdone Corporation wants to set up a private cemetery business. According t
ID: 2778791 • Letter: 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 $106,000 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 $1,590,000.
a. 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.)
b. 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 10 percent on investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Please show the steps so that I can understand how to do it. Thank you!
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 $106,000 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 $1,590,000.
a. 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.)
b. 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 10 percent on investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Please show the steps so that I can understand how to do it. Thank you!
Explanation / Answer
(a) Computation of NPV of the projects.We have,
Step1: Computation of present value of cash inflow.We have,
Present value of Cash inflow = CF / (r -g) = 106,000 / ( 0.10 - 0.04 ) = $ 1,766,667
Hence, the peresent value of cash inflow is $ 1,766,667
Step2: Computation of Net Present Value(NPV).We have,
NPV = Present value of Cash inflow - Cash Outflow
NPV = 1,766,667 - 1,590,000 = $ 176,667
Hence, the net present value of the project is $ 176,667.
(b) Computation of growth rate would the company just break even of the investment.We have,
Investment = Cash flow / ( rate of return - growth rate)
Putting the value in the above formula.We have,
1,590,000 = 106,000 / ( 0.10 - g)
( 0.10 - g ) = 106,000 / 1,590,000 = 0.0667
( 0.10 - g ) = 0.0667
g = 0.10 - 0.0667 = 0.0333 * 100 = 3.33 %
Hence, the company would achieve break even at 3.33 % constant growth rate.So, the 4% growth rate of cash flow is good for the company.
Cash inflow in first year(CF) $ 106,000 Growth rate (g) 4 % Required rate of return(r) 10% Cash outflow $ 1,590,000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.