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-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? 

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Expert Answer

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:

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PV CF1 (r-g) where, r=required rate of retum g growth rate of cash flows CF1 net cash inflow during the first year

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Step 2

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

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PV 95000 (0.11-0.04) 95000 0.07 =S 1,357,143

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Step 3

Net Present Value is calc...

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-Initial Investment + PV NPV NPV = -1480000 1357142.857 NPV = -$122857.142857

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