Short answer – 30 words max) – Yurdone Corp wants to set up a cemetary business.
ID: 2823048 • Letter: S
Question
Short answer – 30 words max) – Yurdone Corp wants to set up a cemetary business. CFO Barry M. Deep is optimistic and sees Cash flow of $127,000 in year one and then growth of 4% per year forever. Initial investment will be $1,700,000. If Yurdone requires an 11% return should the business be started? Because Barry really isn't THAT optimistic about 4% growth - at what % growth would the deal still break even on an NPV basis if required return is 11%?As a financial analyst for Yurdone Corp what is one concern you might have about the sensitivities in the model?
Explanation / Answer
Yes the Business should be started because NPV is positive and growth is more than the breakeven growth of 3.53%
Breakeven ON NPV basis NPV =0 = -1,700,000 + 127,000/(1+11%) + 127000* ( 1+g)/(11%-g)/(1+11%)
1,700,000 -127000/1.11 = 127000/1.11 * (1+g)/(0.11-g)
g = 3.53%, One concern the sensitivity analysis of first year cash flows and subsequent cash flows not taken even though sensitivity of growth is taken.
Best of Luck. God Best of Luck