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 calculate the minimum amount of after-tax annual savings needed, we need to use the formula for calculating the present value of an annuity:

PV = A * [(1 - (1 + r)^-n)/r]

where PV is the present value, A is the annual savings, r is the discount rate (12% in this case), and n is the number of years (5 in this case).

We also need to take into account the effect of depreciation on taxes. From the data provided, we can see that the initial investment is $70,000 and the salvage value is $10,000, so the depreciation expense per year is:

($70,000 - $10,000)/5 = $12,000

Assuming a tax rate of 40%, the tax savings due to depreciation would be:

$12,000 * 40% = $4,800

Therefore, the total after-tax annual savings needed would be:

A + $4,800 = A'

Now we can plug in the values into the formula:

$70,000 = A' * [(1 - (1 + 0.12)^-5)/0.12]

Solving for A', we get:

A' = $12,297

Therefore, the minimum amount of after-tax annual savings needed to make the investment yield a 12% return is $12,297. The answer is C.

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