Short answer 30 words max Yurdone Corp wants to set up a c

Short answer – 30 words max) – 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%?As a financial analyst for Yurdone Corp what is one concern you might have about the sensitivities in the model?

Solution

Yes the Business should be started because NPV is positive and growth is more than the breakeven growth of 3.53%
Breakeven ON NPV basis NPV =0 = -1,700,000 + 127,000/(1+11%) + 127000* ( 1+g)/(11%-g)/(1+11%)
1,700,000 -127000/1.11 = 127000/1.11 * (1+g)/(0.11-g)
g = 3.53%, One concern the sensitivity analysis of first year cash flows and subsequent cash flows not taken even though sensitivity of growth is taken.

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