Question

The Yurdone Corp. 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 $115,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 7 percent per year, forever. The project requires an initial investment of $1,300,000. a-1. If Yurdone requires a 12 percent return on such undertakings, should the cemetery business be started? (Do not round your intermediate calculations. Omit $ sign in your response.) NPV $ a-2. Should the cemetery business be started? Yes, the project should be started. O No, the project should not be started. b. The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what constant growth rate would the company just break even if it still required a 12 percent return on investment? (Do not round your intermediate calculations. Round the answer to 2 decimal places.) The constant growth rate to break-even %

Answer 1

A1:

NPV = PV of cash Inflows - PV of cash Outflows

PV of Cash Inflows = CF1 / [ Ke - g ]

= $ 115,000 / [ 12% -7% ]

= $ 115,000 / 5%

= $ 2300000

NPV = PV of Cash Inflows - PV of Cash Outflow

= $ 2300000 - $ 1300000

= $ 1000000

A2:

Project should be strted As it has +ve NPV

B:

g =Ke - [ CF1/ Investment ]

= 12% - [ 115000 / 1300000 ]

= 0.12- 0.0885

=12% - 8.85%

= 3.15%

Min growth rate shoud be 3.15% to break even the project