Answered: a-2. If the company requires an 11…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 1PA: Your company is planning to purchase a new log splitter for is lawn and garden business. The new...

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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 $145,000 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 $1,900,000.

a-1.

What is the NPV for the project if the company's required return is 11 percent?

The company is somewhat unsure about the 4 percent growth rate assumption 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?

S09-25 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 $145,000 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 $1,900,000.
a-1. What is the NPV for the project if the company's required return is 11 percent? (A
negative answer should be indicated by a minus sign. Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV

a-2. If the company requires an 11 percent return on such undertakings, should the
cemetery business be started?
No
Yes
b.The company is somewhat unsure about the 4 percent growth rate assumption 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? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
Constant growth rate
%

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