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 $164,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4.7 percent per year forever. The project requires an initial investment of $1,825,000.
a. If the company requires a return of 12 percent on such undertakings, should the cemetery business be started?
b. The company is somewhat unsure about the assumption of a 4.7 percent growth rate in 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?