A company is planning to invest $75,000 (before taxes) in a personnel training program. The $75,000 outlay will be charged off as an expense by the firm this year (year 0). The returns estimated from the program in the form of greater productivity and a reduction in employee turnover are as follows (on an after-tax basis): Years 1–5: $7,500 per year Years 6–10: $22,500 per year The company has estimated its cost of capital to be 15 percent. Assume that the entire $75,000 is paid at time zero (the beginning of the project). The marginal tax rate for the firm is 40 percent. Complete the following table to compute the net present value (NPV) of the program. (Hint: When calculating cash flow for Year 0, consider the tax effects of charging off the initial outlay as an expense.) Year Cash Flow PV Interest Factor at 15% Present Value (PV) ($) ($) 0 1.00000 1 0.86957 2 0.75614 3 0.65752 4 0.57175 5 0.49718 6 0.43233 7 0.37594 8 0.32690 9 0.28426 10 0.24718 Net Present Value Based on the NPV criterion, should the firm undertake the training program?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 6P

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A company is planning to invest $75,000 (before taxes) in a personnel training program. The $75,000 outlay will be charged off as an expense by the firm this year (year 0). The returns estimated from the program in the form of greater productivity and a reduction in employee turnover are as follows (on an after-tax basis):

Years 1–5: $7,500 per year

Years 6–10: $22,500 per year

The company has estimated its cost of capital to be 15 percent. Assume that the entire $75,000 is paid at time zero (the beginning of the project). The marginal tax rate for the firm is 40 percent.

Complete the following table to compute the net present value (NPV) of the program. (Hint: When calculating cash flow for Year 0, consider the tax effects of charging off the initial outlay as an expense.)

Year	Cash Flow	PV Interest Factor at 15%
($)	($)
0		1.00000
1		0.86957
2		0.75614
3		0.65752
4		0.57175
5		0.49718
6		0.43233
7		0.37594
8		0.32690
9		0.28426
10		0.24718
		Net Present Value

Based on the NPV criterion, should the firm undertake the training program?

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