[cpa007]

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% 0.57

What would be the annual sayings needed to make the investment realize a 12% yield?

a, $8,189

b, $12,306

c, $13,889

d, $1 1 , 1 1 1

Correct ans is B :$12,306

[clrk217john]

Net Present Value Calculation

Outflow = -50,000
Savings (inflow) are treated as annuity
salvage value $10,000 is a cash inflow.

NPV = -50000 + 3.60 * Savings +10000 * 0.57

This is the equation reflecting $50k outflow now, savings at an annuity w pv factor 3.6 and sale of the investment after 5 years at 0.57 PV factor.

Set the NPV equal to zero and solve the equation, you get Savings = 12306.

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[Author]

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