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 $127,000 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 $1,700,000.
a.)If Yurdone requires an 11 percent return on such undertakings, should the cemetery business be started?
b.) The company is somewhat unsure about the assumption of a growth rate of 4 percent 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?
PV of cash flows = cash flow in year 1 *(1 + growth rate ) / ( required rate of return - growth rate)
= 127000 / ( 0.11 -0.04) = 1814285.71
NPV = PV of cash flows - initial investment = 1814285.71 - 1700000 = 114285.71
The project should be accepted as NPV is greater than 0.
1700000 = 127000 *( 1 + g) / ( 0.11 - g)
187000 - 1700000g = 127000 + 127000g
60000 = 1827000g
g = 60000 /1827000 = 3.28%
The yurdone corporation wants to set up a private cemetery business. According to the CFO, Barry...
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 $128,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 6.1 percent per year forever. The project requires an initial investment of $1,510,000. a. If Yurdone requires a return of 13 percent on such undertakings,...
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