Question

P12-2: Breakeven cash inflows The Sleek Ring Company, a leading producer of fine cast silver jewelry, is considering the purchase of new casting equipment that will allow it to expand its product line. The up-front cost of the equipment is $690,000. The company expects the equipment to produce steady income throughout its 15-year life. a. If Sleek Ring requires an 8% return on its investment, what minimum yearly cash inflow will be necessary for the company to go forward with this project? b. How would the minimum yearly cash inflow change if the company required an 11% return on its investment?

Answer 1

The company will require inflows of 80,612 per year to achieve their minimun return of 8%

If this return increase to 11% then, the cash inflow will need to be in the order of 95,955.02

Step-by-step explanation:

We will calcualte the minimun cash flow at the request rate by treating the upfront cost as the present value of an ordinary annuity.

(A)

`PV / (1-(1+r)^(-time) )/(rate) = C\\`

PV $690,000.00

time 15 years

rate 0.08 = 8%

`69,0000 / (1-(1+0.08)^(-15) )/(0.08) = C\\`

C $ 80,612.39

PV $690,000.00

time 15 years

rate 0.11 = 11%

`690000 / (1-(1+0.11)^(-15) )/(0.11) = C\\`

C $ 95,955.02