Please do Not answer by showing the spreading sheet layout! The Yurdone Corporat
ID: 2665516 • Letter: P
Question
Please do Not answer by showing the spreading sheet layout!
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 $ 60,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 6 % per year forever. The project requires an initial investment of $ 925,000.
a) if Yurdone requires a 13 % return on such undertakings, should the cemetery business be started?
b) The company is somewhat unsure about the assumption of a 6 % growth rate in its cash flows. At what constant growth rate would the company just break even if it still required a 13 % return on investment?
Explanation / Answer
a) first year net cash inflows = $ 60,000 projected growth rate = 6 % per year forever initial investment of the project = $ 925,000 NPV = (PV of cash inflows – PV of cash outflows) PV of cash outflows = $ 925,000 PV of cash inflows = cash inflows / (R – g) = 60,000 / (.13 - .06) = $ 857,142.86 NPV = 857,142.86 – 925,000 NPV = $ - 67,857.14 since the NPV is negative, the corporation should not accept the project. b) NPV = 0 0 = -925,000 + 60,000 / (.13 – g) 925,000 = 60,000 / (.13 – g) 925,000(.13 – g) = 60,000 .13 – g = .06486 g = .06514 = 6.514 % at 6.514 % the corporation would break even.