Chapter 5, Problem 23QP

NPV Valuation 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 n.et cash inflow of $315,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4.5 percent per year forever. The project requires an initial investment of $4, 100,000.

1. a. If Yurdone requires a return of II percent on such undertakings, should the cemetery business be started'!
2. b. The company is somewhat unsure about the assumption of a growth rate of 4.5 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?