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FinanceQ&A LibraryThe 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 $95,000 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 $1,480,000. a-1What is the NPV for the project if the company's required return is 11 percent?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?Question

Asked Oct 25, 2019

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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 $95,000 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 $1,480,000. |

a-1 |
What is the NPV for the project if the company's required return is 11 percent? |

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? |

Step 1

a) For the firm to accept a project, it will first determine the Net Present Value (NPV) of the project. If the NPV is positive, the project should be accepted.

In this case, first cash flow (CF1) will be at the end of the next year and would then continue to grow (g) at a rate of 4% forever.

According to the Gordon Growth Model, present value (PV0) of all the cash flows could be calculated as below:

Step 2

Solving the equation as below, the present value of all the cash inflows is $1,357,143

Step 3

Net Present Value is calc...

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