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?
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?
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 $75,000 is paid at time zero (the beginning of the project). The marginal tax rate for the firm is 40 percent.
Complete the following table to compute the net present value (NPV) of the program. (Hint: When calculating cash flow for Year 0, consider the tax effects of charging off the initial outlay as an expense.)
Year
|
Cash Flow
|
PV Interest Factor at 15%
|
Present Value (PV)
|
---|---|---|---|
($)
|
($)
|
||
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?
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