Starbucks, Inc., a leading producer of fine cast silver jewelry, is considering

Question

Starbucks, Inc., a leading producer of fine cast silver jewelry, is considering the purchase of new casting equipment that will allow it to expand the product line into award plaques. The proposed initial investment is $35,000. The company expects that the equipment will produce steady income throughout its 12-year life.

a. If Starbucks requires a 14% 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 a 10% return on its investment?

Explanation / Answer

We have PV of Investment = 35000, nper=12 Yrs a. Rate = 14%. Using Excel function PMT, we get PMT=PMT(rate,nper,pv) ie PMT = PMT(14%,12,-35000) = $6,183.43 If we take NPV of this as NPV(14%,$6,183.43,$6,183.43,......12 times)-35000 = 0.00 SO Min CF reqd is $6,183.43. If CF exceeds $6,183.43, NPV > 0 & investment will yield positive returns. b. Rate = 10%. Using Excel function PMT, we get PMT=PMT(rate,nper,pv) ie PMT = PMT(10%,12,-35000) = $5,136.72 SO Min CF reqd is $6,183.43. If CF exceeds $6,183.43, NPV > 0 & investment will yield positive returns.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.