Question

6) The Xdiagnose 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 $139,704 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of $1.1 million. If Xdiagnose requires a 13.5 percent return on such undertakings, what is the NPV of the project?

Answer 1

Net Present Value (NPV) of the project

Here, we’ve Cash flow in year 1 (CF1) = $139,704

Initial Investment Cost = $11,00,000

Growth Rate (g) = 4% per year

Required Rate of Return (Ke) = 13.50%

This is the case of Perpetual cash inflow. The Net Present Value (NPV) of the project is calculated as follows

Net Present Value (NPV) of the project = Present value of perpetual cash flows – Initial investment cost

= CF1/(Ke – g) – Initial Investment Cost

= [$139,704/(0.1350 – 0.04)] - $11,00,000

= [$139,704/0.0950] - $11,00,000

= $14,70,568.42 - $11,00,000

= $3,70,568.42

“Hence, the Net Present Value (NPV) of the project would be Positive $3,70,568.42 and therefore, the Xdiagnose Corporation should accept the Project”