Choice "C" is correct. The annual savings needed to make the investment realize a 12% yield is where the present value of the cash savings/inflows equals the present value of the net cash outflows. Use algebra to calculate the annual savings, as follows:
PV cash savings/inflows | = | PV net cash outflows |
annual savings × 3.60 | = | $50,000 − $10,000(.57) |
annual savings | = | ($50,000 − $5,700)/3.60 |
| = | $12,306 |
Choice "a" is incorrect. The annual savings needed to make the investment realize a 12% yield is where the present value of the cash savings/inflows equal the present value of the net cash outflows.Choice "d" is incorrect. Subtract the present value of $10,000 due in 5 years at 12%, or $10,000 × .57$5,700. Don't subtract the entire $10,000.Choice "b" is incorrect. Subtract the present value of the $10,000 residual value from the $50,000 cost.
