6. A company is planning to invest $1000,000 (before tax) in a personnel trainin

Question

6. A company is planning to invest $1000,000 (before tax) in a personnel training program. The $100,000 outlay will be charged off as an expense by the firm this year (year) 0. The returns from the program in the form of greater productivity and a reduction in employee turnover are estimated as follows (on an after-tax basis):

Year 1-10 $10,000 per year
Year 11-20 $72,000 per year

The company has estimated its cost of capital to be 12 percent. Assume that the entire $100,000 is paid at time 0 (the beginning of the project). The marginal tax rate for the firm is 40 percent. Should the firm undertake the training program? Why or why not?

Explanation / Answer

NPV =-($1000,00+$100,000 ) +[$10,000/1.12 +$10,000/1.12^2 +$10,000/1.12^3 .....$10,000/1.12^10 + $72,000/1.12^11 +$72,000/1.12^12 ...........$72,000/1.12^20]*(1-40%) =-$87,508.33 NPV is negative and hence the firm shouldn't undertake the training program

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