Western Electronics (WE) is reviewing the following data relating to a new equipment proposal: 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)?

Question

Western Electronics (WE) is reviewing the following data relating to a new equipment proposal:  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)?

Quizplus · Accepted Answer

To solve the problem, we need to calculate the net present value (NPV) of the investment with a 12% discount rate and find the after-tax annual savings that will make the NPV equal to $0. The formula to calculate the NPV is:

NPV = -Initial Investment + (Cash Flows / (1+r)^t)

Where:

Initial Investment = $210,000
Cash Flows = After-Tax Annual Savings
r (discount rate) = 12%
t = 1 to 5 years

Assuming the after-tax savings are equal for each of the 5 years, we can calculate it as follows:

NPV = 0 = -$210,000 + (After-Tax Annual Savings / 0.12) x [1 - 1/(1+0.12)^5]

Solving for After-Tax Annual Savings, we get:

After-Tax Annual Savings = NPV x 0.12 / [1 - 1/(1+0.12)^5]

After plugging in the values, we get:

After-Tax Annual Savings = $12,296.70

Rounding up to the nearest whole dollar, the minimum amount of after-tax annual savings needed to make the investment yield a 12% return is $12,297.

Therefore, the answer is C.

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