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 $54,000 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 $608,000.

Required:

a. If Yurdone requires a 12 percent return on such undertakings, the NPV of the project is $________ (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)) and the cemetery business be started.

b. The company is somewhat unsure about the assumption of a 5 percent growth rate in its cash flows. The company would just break even at a constant growth rate of_________ percent (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)) if it still required a 12 percent return on investment.

Explanation / Answer

a.

PV of a growing perpetuity is given by

PV = Cashflow 1 / (R-g) = 54000/(0.12-0.05) = $771428.57

NPV = Initial investment + PV = -608000 + 771428.57 = $163428.57

b.

At breakeven NPV = 0

0 = -608000 + 54000/(0.12-g)

g = 0.0312 = 3.12%

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