Yuvhadit Ltd 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 €80,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 6 per cent per year for ever. The project requires an initial investment of €800,000.

(a) If Yuvhadit requires a 12 per cent return on such undertakings, should the cemetery business be started?

(b) The company is somewhat unsure about the assumption of a 6 per cent growth rate in its cash flows. At what constant growth rate would the company just break even if it still required a 12 per cent return on investment?

Expert Answer

First year initial envestment 2 growth rate of perpekeity 2 = 12%. PV of perpetuity…View the full answer

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