# The yurdone corporation wants to set up a private cemetery business. according to the cfo, barry m.

###### Question:

## Answers

Net Present Value for this project is -411,111.11

Explanation:

Net Present Value is the difference between present values of future cash flows and present value of future cash outflows. Since, the outflows are paid today, we don't need to discount them.

Since we have indefinite period of time and expected net cash inflow of 107,000$ after first year, where it is expected to grow annually at 3%, we can use following formula:

P V = F V / i-g, where g is annual growth rate of future cash inflow. Therefore, we will have P V = 1,188,888. In order to calculate N P V we need to calculate the difference between P V and initial investments. Finally, we get -411,111.11

-$414,444.44

Explanation:

The computation of the net present value is shown below:

Net present value = Initial investment + net cash flows ÷ (required rate of return - projected growth rate)

= -$1,570,000 + $104,000 ÷ (12% - 3%)

= -$1,570,000 + $1,155,555.56

= -$414,444.44

Hence, the net present value is -$414,444.44

Since the net present value comes in negative so the project is rejected

A) NPV= - $428,888.89 B) Company would break Even if g = 5.68%

Explanation:

Hi, we have to bring to present value all the inflows and outflows of cash, this is the formula to use and the math of it.

[tex]NPV=-Invesment+\frac{CashFlowYr1}{(return-growth)}[/tex]

[tex]NPV=-1440000+\frac{91000}{(0.12-0.03)} = -428888.89[/tex]

The question says that "at what constant growth rate would the company just break even..." and well, a NPV=0 is not precisely break even, actually, it means that the company is obtaining exactly what is asking for any investment, but let´s assume that the question was, what should the growth rate be for the company to accept this project?. So we have to solve the first equation for "g", that is:

[tex]g=\frac{(Invesment*return-CashFlowYr1)}{Invesment} =\frac{(1440000*0.12-91000)}{1440000} =0.0568[/tex]

So the constant growth rate has to be at least 5.68% for the company to accept this project (NPV=0)

Best of luck

a. The cemetery business be started

b. The company will just break even at a constant growth rate of 4.4%

Explanation:

A. To know whether to start the cemetery business or not, we need to subtract the present value of the initial outlay to generate the NPV and if the result is positive, it will be advisable to start the business and if otherwise, it won't be advisable to start the cemetery business.

This is a question on perpetuity growth. let us extract the information in the question

Initial investment = $1,425,000

Cash inflow in year 1 (C) = $109,000

Cost of capital (r) = 12%

Growth Rate (g) = 5.1%

Net Present Value (NPV) = PV of Growing Perpetuity - Initial

investment

NPV = {C/(r-g)} - Initial Investment

NPV = {109,000 /(12% - 5.1%)} - 1,425,000

NPV = {109,000 /(0.12 - 0.5.1)} - 1,425,000

NPV = {109,000 /(0.69)} - 1,425,000

NPV = 1,579,710.15 - 1,425,000

NPV = $154,710.15

Since the net present value (NPV) of the project is positive, the cemetery business should be started.

b. At break even, PV of Growing Perpetuity = Initial investment

C/(r-g) = Initial investment

Initial investment = 1,425,000

C = $109,000

r = 12%

g = Unknown

109,000 /(12% - g) = 1,425,000

109,000 /(0.12 - g) = 1,425,000

1,425,000 (0.12 - g) = 109,000

171,000 - 1,425,000g = 109,000

- 1,425,000g = 109,000 - 171,000

- 1,425,000g = -62,000

- 1,425,000g/ - 1,425,000 = -62,000/- 1,425,000

g = 0.04351

Convert the answer to percentage 0.04351 * 100% = 4.4%

That is, the company will just break even at a constant growth rate of 4.4%

Answer

The answer and procedures of the exercise are attached in the following archives.

Step-by-step explanation:

You will find the procedures, formulas or necessary explanations in the archive attached below. If you have any question ask and I will aclare your doubts kindly.

[tex]The yurdone corporation wants to set up a private cemetery business. according to the cfo, barry m.[/tex]

NPV= $720,454.55

Explanation:

Giving the following information:

The cemetery project will provide a net cash inflow of $105,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5 percent per year forever. The project requires an initial investment of $1,580,000.

Rate of return= 10%

First, we need to calculate the present value of a perpetual growing flow:

PV= cash flow year 2/(interest rate - growth rate)= (105,000*1.05)/(0.10-0.05)= 2,205,000

Now, we can calculate the Net Present Value:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

NPV= -1,580,000 + 105,000/1.10 + 2,205,000

NPV= $720,454.55

See attached pictures.

Explanation:

See attached pictures for explanation.

[tex]The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M.[/tex]

[tex]The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M.[/tex]

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Explanation:

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Solution and Explanation:

Answer 1 The Net present value = the Present value of all the cash inflows minus the present value of all the cash outflows

[tex]$=145000 /(11 \text { percent minus } 4 \text { percent })-1900000$[/tex]

= $171428.57

Answer a-2) yes, definitely the business should be started as the net present value is positive.

Answer b) Break even growth rate = the required rate – Cash flows / investment

[tex]=11 \%-145000 / 1900000[/tex]

= 3.37 percent.

What is the NPV for the project if Yurdone's required return is 10 percent?

$358,000If Yurdone requires a return of 10 percent on such undertakings, should the firm accept or reject the project?

Yes, because the project's NPV is positive, which means that its IRR is higher than the required rate of return.At what constant growth rate would the company just break even if it still required a return of 10 percent on investment?

3.72%Explanation:

initial investment = $1,400,000

net cash inflow₁ = $87,900

perpetual growth rate = 5%

required rate of return = 10%

project's current intrinsic value = $87,900 / (10% - 5%) = $1,758,000

project's NPV = $1,758,000 - $1,400,000 = $358,000

$1,400,000 = $87,900 / (10% - g)

$1,400,000(10% - g) = $87,900

$140,000 - $1,400,000g = $87,900

$140,000 - $87,900 = $1,400,000g

$52,100 = $1,400,000g

g = $52,100 / $1,400,000 = 3.72%