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 $145,000 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 $1,900,000.a-1. What is the NPV for the project if the company's required return is 11 percent?a-2. If the company requires an 11 percent return on such undertakings, should the cemetery business be started?b. The company is somewhat unsure about the 4 percent growth rate assumption 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?

Answer 1

Solution and Explanation:

Answer 1 The Net present value = the Present value of all the cash inflows minus the present value of all the cash outflows

`$=145000 /(11 \text { percent minus } 4 \text { percent })-1900000$`

= $171428.57

Answer a-2) yes, definitely the business should be started as the net present value is positive.

Answer b) Break even growth rate = the required rate – Cash flows / investment

`=11 \%-145000 / 1900000`

= 3.37 percent.