Western Electronics (WE) is reviewing the following data relating to a new equipment proposal: $\begin{array}{|l|c|}
\hline \text { Net initial investment } & \$ 50,000 \
\hline \text { After-tax cash inflow from disposal of the investment after } 5 \text { years } & \$ 10,000 \
\hline \text { Present value of an annuity of } \$ 1 \text { at } 12 \% \text { for } 5 \text { years } & 3.605 \
\hline \text { Present value of } \$ 1 \text { at } 12 \% \text { in } 5 \text { years } & 0.567 \
\hline
\end{array}$ 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)?
A)$8,189.
B)$11,111.
C)$12,297.
D)$13,889.
E)$15,678.

Question

Quizplus · Accepted Answer

To find the minimum after-tax annual savings needed, we use the formula for the present value of an annuity: $ \text{Net initial investment} = \text{Annual savings} \times \text{Present value of an annuity factor} $. Solving for the annual savings: $ \$50,000 = \text{Annual savings} \times 3.605 $. Thus, $ \text{Annual savings} = \frac{\$50,000}{3.605} \approx \$13,879 $. However, this calculation seems incorrect as it doesn't match any option. Let's correct it: $ \text{Annual savings} = \frac{\$50,000 - (\$10,000 \times 0.567)}{3.605} \approx \$12,297 $.

Western Electronics (WE) Is Reviewing the Following Data Relating to a New