Question

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 $124,277 for the firm during the first year, and the cash flows are projected to grow at a rate of 3 percent per year forever. The project requires an initial investment of $2.3 million. If Xdiagnose requires a 8.5 percent return on such undertakings, what is the NPV of the project?

Answer 1

The NPV is computed as shown below:

= Initial investment + Net cash flow in 1st year / (1 + required rate of return) + 1 / (1 + required rate of return) x [ ( Net cash flow in 1st year (1 + growth rate) / ( required rate of return - growth rate) ]

= - $ 2,300,000 + $ 124,277 / 1.085 + 1 / 1.085 [ ($ 124,277 (1 + 0.03) / (0.085 - 0.03) ]

= - $ 2,300,000 + $ 124,277 / 1.085 + $ 2,327,369.273 / 1.085

= - $ 2,300,000 + $ 2,451,646.273 / 1.085

= - $ 40,418.18 Approximately

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