If a firm is considering investing $100,000 at the end of 2021 for employee training (operating expense). The benefit of the training is to reduce turnover leading to a decrease in operating expenses of $10,000 per year in the future. The firm’s working capital to revenue ratio is 10% and the firm’s WACC is 6%. Is it better to analyze this investment decision by considering the incremental after-tax operating profit or the incremental after-tax cash flows generated by this investment? Why?

If a firm is considering investing $100,000 at the end of 2021 for employee training (operating expense). The benefit of the training is to reduce turnover leading to a decrease in operating expenses of $10,000 per year in the future. The firm’s working capital to revenue ratio is 10% and the firm’s WACC is 6%. Is it better to analyze this investment decision by considering the incremental after-tax operating profit or the incremental after-tax cash flows generated by this investment? Why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 4P

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