# An investment has an installed cost of \$673,658. The cash flows over the four-year life of the investment

QUESTION

An investment has an installed cost of \$673,658. The cash flows over the four-year life of the investment are projected to be \$228,701, \$281,182, \$219,209, and \$190,376.Requirement 1:If the discount rate is zero, what is the NPV?(Do not round intermediate calculations.) NPV\$Requirement 2:If the discount rate is infinite, what is the NPV (Do not round intermediate calculations. Negative amount should be indicated by a minus sign.) NPV\$Requirement 3:At what discount rate is the NPV just equal to zero (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Discount rate % 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 \$109,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.1 percent per year forever. The project requires an initial investment of \$1,425,000.
Required:(a)If Yurdone requires a return of 12 percent on such undertakings, what is the NPV of the project (Do not round intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).)
NPV\$
(b)Should the cemetery business be started?(Click to select)NoYes
(c)The company is somewhat unsure about the assumption of a growth rate of 5.1 percent its cash flows. At what constant growth rate would the company just break even if it still required a return of 12 percent on its investment (Do not round intermediate calculations.Enter your answer as a percentage rounded to 2 decimalplaces (e.g., 32.16).)
Minimum growth rate %
Concept: Net Present Value (NPV) evaluates the present value of all future cash flow (both inflows and outflows). If NPV value is positive then project should be accepted. Net Present Value = CF1/(1+r) + CF2/(1+r)^2 + . + CFn/(1+r)^n Initial Investment For growing perpetuity of cash flows: Present Value of Cash Flows (Perpetuity) = Annual Cash Flow*(1+g)/(r-g) Where CF1, CF2, . , CFnare future cash flows r -> Discount Rate n -> number of periods g -> Growth Rate Solution: (a) Initial Investment = \$673658 Cash Flow for Year 1: Net Cash Flow = \$228701 Cash Flow for Year 2: Net Cash Flow = \$281182 Cash Flow for Year 3: So Net Cash Flow = \$219209 Cash Flow for Year 4: Net Cash Flow = \$190376 (1) Discount Rate = 0% So, Net Present Value (NPV) = \$228701/(1+0%) + \$281182/(1+0%)^2 + \$219209/(1+0%)^3 + \$190376/(1+0%)^4 \$673658 NPV = \$245810 Therefore, Net Present Value at 0 discount rate is \$245810 . (2) Discount Rate is infinite, So discounting factor (1/(1+r)^n) will be 0. So Net Present Value (NPV) = \$0 \$673658 = -\$673658 Therefore, Net Present Value at infinite discount rate is -\$673658 . (c) If NPV is 0 then discount rate will be Internal Rate of Return. So, \$228701/(1+r%) + \$281182/(1+r%)^2 + \$219209/(1+r%)^3 + \$190376/(1+r%)^4 \$673658 = 0 We use hit and trial method to evaluate the value of Return Rate. Try r = 10% Present Value of Cash Flows = \$228701/(1+10%) + \$281182/(1+10%)^2 + \$219209/(1+10%)^3 + \$190376/(1+10%)^4 =

35016.15 This value is not equal to \$673658. Try r = 11% Present Value of Cash Flows = \$228701/(1+16%) + \$281182/(1+16%)^2 + \$219209/(1+16%)^3 + \$190376/(1+16%)^4 = \$674315.70 This value is not equal to \$673658. Try r = 14.30% Present Value of Cash Flows = \$228701/(1+14.30%) + \$281182/(1+14.30%)^2 + \$219209/(1+14.30%)^3 + \$190376/(1+14.30%)^4 = \$673651.51 This value is approximately equal to \$673658. So, Internal Rate of Return = 14.30% Therefore, discount rate is 14.30% . (b) For Yurdone Corporations cemetery project: Initial Investment = \$1425000 Cash Flow for Year 1: Net Cash Flow = \$109000 Growth Rate = 5.1% (1) Discount Rate = 12% Present Value of Future Cash Flows (at year 1) = \$109000*(1+5.1%)/(12%-5.1%) = \$1660275.36 Present Value of Future Cash Flows (at year 0) = \$1660275.36/(1+12%) = \$1482338.71 So, Net Present Value (NPV) = \$1482338.71 \$1425000 NPV = \$57388.71 Therefore, Net Present Value of the cemetery project is \$57388.71 . (2) NPV of cemetery project is positive . So, project should be accepted. Therefore, the cemetery business should be started . (3) The company is unsure about the assumption of a growth rate of 5.1 percent its cash flows. For breakeven point, NPV should be 0. So, Present Value of Future Cash Flows will be equal to initial investment. Present Value of Future Cash Flows (at year 0) = \$1425000 Present Value of Future Cash Flows (at year 1) = \$1425000*(1+12%) = \$1596000 Required Rate of Return = 12% Annual Cash Flow = \$109000 According to Present Value of Perpetuity Formula: \$1596000 = \$109000*(1+g)/(12%-g) So, Growth Rate = 4.84% Therefore, minimum growth rate will be 4.84% for break even point for the company.