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 $126,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.9 percent per year forever. The project requires an initial investment of $1,490,000.
a.	If the company requires a return of 15 percent on such undertakings, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b.	The company is somewhat unsure about the assumption of a growth rate of 5.9 percent in its cash flows. At what constant growth rate would the company just break even if it still required a return of 15 percent on its investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

I found this problem here twice, once rounded to the nearest dollar and once rounded to nearest two decimal places. I have tried both with formulas and with ba II plus calculator. My assignment is not accepting either of these answers.

Answer 1

a]

NPV of project = (first year cash flow / (required return - growth rate)) - initial investment

NPV of project = ($126,000 / (15% - 5.9%)) - $1,490,000

NPV of project = -$105,384.62

b]

To break even, the NPV should equal zero.

NPV of project = (first year cash flow / (required return - growth rate)) - initial investment

0 = ($126,000 / (15% - growth rate)) - $1,490,000

growth rate = 15% - ($126,000 / $1,490,000)

growth rate = 6.54%

The company will break even at 6.54%