Question

__ 2. (CPA adapted) Brewster Co. is reviewing the following data relating to an energy-saving investment proposal:

Net initial investment $50,000

After-tax cash flow from disposal of the investment at the end of 5 years 10,000

Present value of an annuity of $1 at 12% for 5 years    3.60

Present value of $1 at 12% in 5 years 0.57

What is the amount of after-tax annual savings (including the depreciation effects) needed for the investment to provide a 12% return?

Answer 1

Net initial investment	$50,000
Present value of after-tax Salvage value	($5,700)
[10,000 x 0.57 Present value of $1 at 12% in 5 years]
Total present value	$44,300
÷ Present value annuity of $1 at 12% for 5 years	$3.60
=After tax annual savings (including the depreciation effects) needed	12305.56

Verification:

Present value of annual cash inflows	$44,300
[12305.56 x 3.60 PV annuity factor (5years ,12%)]
Present value of after-tax salvage value	$5,700
[10,000 x 0.57 PV factor (5years, 12%)]
Net initial investment	$50,000