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 $105,000 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 $1,580,000. What is the NPV for the project if Yurdone's required return is 10 percent?

Answer 1

NPV= $720,454.55

Step-by-step explanation:

Giving the following information:

The cemetery project will provide a net cash inflow of $105,000 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 $1,580,000.

Rate of return= 10%

First, we need to calculate the present value of a perpetual growing flow:

PV= cash flow year 2/(interest rate - growth rate)= (105,000*1.05)/(0.10-0.05)= 2,205,000

Now, we can calculate the Net Present Value:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

NPV= -1,580,000 + 105,000/1.10 + 2,205,000

NPV= $720,454.55