Question

Western Electronics (WE) is reviewing the following data relating to a new equipment proposal: Net initial investment outlay $ 50,000 After-tax cash inflow from disposal of the asset after 5 years $ 10,000 Present value of an annuity of $1 at 12% for 5 years 3.605 Present value of $1 at 12% in 5 years 0.567 WE expects the net after-tax savings in cash outflows from the investment to be equal in each of the 5 years. What is the minimum amount of after-tax annual savings (including depreciation effects) needed to make the investment yield a 12% return (rounded to the nearest whole dollar)?

Answer 1

Answer:

The answer is $12,297.

Explanation:

Denote x is the minimum amount of after-tax annual savings (including depreciation effects) needed to make the investment yield a 12% return.

As required in the question, at $X annual after-tax saving, the net present value of the project discounted at the required return 12% will be equal to 0. So, we have:

- Net initial investment + Present value of cash inflow from asset disposal in 5-year + Present value of 5 after-tax annual savings = 0 <=>  -50,000 + 10,000 x 0.567 + X x 3.605 = 0 <=> 3.605X = 44,330 <=> X = $12,297 (rounded to the nearest whole dollar).

Thus, the answer is $12,297.