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The ABC 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 $40,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $650,000. (a) If ABC requires a 14 percent return on such undertakings, should the cemetery business be started? Why? (b) The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what constant growth rate would the company just break even if it still required a 14 percent return on investment?
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