a] | NPV = PV of cash inflows-Initial investment | |
The cash inflows are a growing perpetuity, whose | ||
PV = C/(r-g), where C = the first year cash flow, | ||
r = required retrun and g = growth rare in cash flow. | ||
Substituting values, we have | ||
PV of cash inflows = 118000/(0.15-0.061) = | $ 13,25,842.70 | |
Less: Initial investment | $ 14,10,000.00 | |
NPV [1325842.70-1410000] | $ -84,157.30 | |
b] | For breaking even NPV = 0 | |
For 0 NPV | ||
1410000 = 118000/(0.15-g), where g = the required | ||
growth rate for just breaking even at required | ||
return of 15%. | ||
Solving for g | ||
0.15-g = 118000/1410000 | ||
g = 0.15-118000/1410000 = 6.63% | ||
Minimum growth rate = 6.63% |
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The yurdone corporation wants to set up a private cemetery
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up." As a result, the cemetery project will provide a net cash
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forever. The project requires an initial investment of
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