Chapter 9, Problem 25QP

NPV Valuation [LO1] 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 $127,000 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 $ 1,700,000.

a. If Yurdone requires an 11 percent return on such undertakings, should the cemetery business be started?

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?