Detailed Answer
(c) The requirement is to determine the annual savings
needed for an investment to realize a 12% yield. The internal rate
of return method of capital budgeting determines the rate of
return at which the present value of the cash flows will exactly
equal the investment outlay. In this problem, the desired IRR is
given and the cash flows must be determined. The necessary
annual savings can be computed as follows:
TVMF × Cash flows = PV (investment today)
3.60X + (.57 × $10,000) = $50,000
3.60X = $50,000 – (.57 × $10,000)
3.60X = $44,300
X = $12,306
If the annual savings equals $12,306, the present value of the cash
inflows will exactly equal the cash outflows.