Etsitty Arts, Inc., a leading producer of fine cast silver jewelry, is consideri

Question

Etsitty Arts, 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 Etsitty 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 a10% return on its investment?

Explanation / Answer

a.cashflow x PVIFA(14%,12)=35000 35000=cashflow x { [1.14^12]-1}/(.14x1.14^12) Cashflow= 35000/5.660 Cashflow= $6183.41 b.cashflowx PVIFA(10%,12)=35000 35000=cashflow x { [1.10^12]-1}/(.10x1.10^12) cashflow= 35000/6.8137 Cashflow= $5136.71 The cashflow will decrease by $1046.7

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