Toolkit Decision Rules PBAK IRR NPV NPV Valuation Yurdone

(Toolkit – Decision Rules – PBAK, IRR, NPV) NPV Valuation - 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%?

Question 17 options:

Yes, 3.5%

Yes, 4.0%

No, 3.5%

No, 4.0%

Solution

Present value of cash flow =CF1/(R-g)

              = 127000 / (.11 -.04)

              =127000 / .07

              = 1814285.71

NPV = Present value -Initial investment

     = 1814285.71 - 1700000

       = 114285.71

since NPV is positive business should be started .

2)At Breakeven ,NPV is 0such that present value =initial investment

1700000 = 127000/(.11-g)

(.11 -g) = 127000/1700000

(.11-g) = .0747

g = .11-.0747 = .0353 or 3.53%

correct option is \"A\" - yes and 3.5%