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I’m trying to to understand the fundamental concept of this question. I understand the concept of NPV and and how annuity calculation comes into play of calculating NPV but I cannot wrap my head around UNDERSTANDING this question as a whole, even after looking at the solution.
Para Co. is reviewing the following data relating to an energy saving investment proposal:
Cost $50,000
Residual 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 due in 5 years at 12% 0.57What would be the annual sayings needed to make the investment realize a 12% yield?
a, $8,189
b, $12,306
c, $13,889
d, $11,111Answer is B and this is their explanation:
PV cash savings/inflows = PV net cash outflows
Annual savings x 3.60 = $50,000 – $10,000(0.57)
Annual savings = ($50,000 – $5,700)/3.60
Annual savings = $12,306
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