Question

he 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 $107,000 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 $1,600,000.

  

a-1	What is the NPV for the project if the company's required return is 12 percent?

a-2 If the company requires a return of 12 percent on such undertakings, should the cemetery business be started?

Answer 1

an 107000 Value at (time =1) = 10.7000 x 1.03 Required - growth return lofooo X 1003 612-003 = $ 1 224 555-56 Total cash flow at (time = 1) = 107000 = 1331555. 56 = $1188888.89 Value at (time =o) = 1331555.56 1-12 Net Present Value - yo8888.89 - 1600000 = -411111 o .: NPV = - $ 4101011 az) & NPV is negative, the project should not be accepted. Thus cemetery business should not be started.