The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking u
p." As a result, the cemetery project will provide a net cash inflow of $97,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4% per year for the following 5 years, at which time the business will be closed. The project requires an initial investment of $1,500,000. If Yurdone requires an 11% return, should the cemetery business be started? (Note: to calculate the next years cash flow, multiply last years cash flow by 1 + the growth rate. For example, cash flow for year 2 will be $97,000*(1+4%) = $100,880 ).
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Answer:
$2,503 = Depreciation Expense
Explanation:
Net profit = $6,230 that is amount added to retained earnings.
Net profit = Sales - Cost - Depreciation - Interest - Taxes - Dividends
Sales = $104,650
Costs = $87,300
Interest = $1,620
Earnings before depreciation and taxes = $104,650 - $87,300 - $1,620 = $15,730
Earnings after interest depreciation and taxes = $6,230 + $2,500 = Net profit + Dividend = $8,730
Therefore
(15,730 - Depreciation) - (15,730 - Depreciation) 34% = $8,730
$15,730 - Depreciation - ($5,348 - 0.34 Dep) = $8,730
$10,382 - 0.66 Depreciation = $8,730
$1,652 = 0.66 Depreciation
$2,503 = Depreciation Expense