$3388 is the minimum required annual savings
Explanation:
a) First we have to calculate the present value of the salvage amount:
Step1: Go to excel and "click" insert to insert the function.
Step2: Select the "PV" function as we are finding the present value in this case.
Step3: Enter the values as Rate = 10%; Nper = 6; PMT = 0; FV = -5000
Step4: Click "OK" to get the desired value.
The value comes to "$2,822.37"
Now, the present value is $25,000 plus $2,822 = $27,822
Calculating the annual cash inflows using excel sheet:
Step1: Go to excel and click "insert" to insert the function.
Step2: Select the "PMT" function as we are finding the annaul cash inflows
Step3: Enter the values as Rate = 10%; Nper = 6; PV = -27822; FV = 0
Step4: Click "OK" to get the desired value.
The value comes to " $6,388"
Therefore, the annual cash inflows are $6,388
To calculate the annual savings, we deduct the annual operating costs from annual cash inflows
Annual savings = $6,388 - $3,000
= $3,388
