Wish 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 forever. The project requires an initial investment of £800,000.
(a) If Wish 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?