A company is planning to invest $75,000 (before taxes) in a personnel training program. The $75000 outlay will be charged off as an expense by the firm this year (Year 0). The returns estimated from the program in the forms of greater productivity and less employee turnover are as follows (on an after-tax basis):

Question

Years 1-10: $7,500 per year
Years 11-20: $22,500 per year
The company has estimated its cost of capital to be 15%. 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%. Based on the net present value criterion, should the firm undertake the training program?

Answer 1

The company will undertake the training program if NPV is positive and reject the project if NPV is negative.

When the cost of capital is 15% , the NPV can be calculated as :

($8,214.41)
NPV is negative , So the company will not accept the training program.

Here no need to consider the marginal tax rate ( which is given as 40%) as all the cash flows are given as after tax basis .

Answer 2

The company will undertake the training program if NPV is positive and reject the project if NPV is negative.

When the cost of capital is 15% , the NPV can be calculated as :

($8,214.41)
NPV is negative , So the company will not accept the training program.

Here no need to consider the marginal tax rate ( which is given as 40%) as all the cash flows are given as after tax basis .

Answer 3

Calculation based on an after-tax basis. We will subtract the taxes from the initial outlay: 75,000-75,000*0.40 = 45,000.

Calculate the Net Present Value:



End of the Year Actual Dollar Benefit PV interest (15%) Present Value(PV)

0 -45,000 1 -45,000

1 7,500 .86957 6521.775

2 7,500 .75614 5671.05

3 7,500 .65752 4931.40

4 7,500 .57175 4288.125

5 7,500 .49718 3728.85

6 7,500 .43233 3242.475

7 7,500 .37594 2819.55

8 7,500 .3269 2451.75

9 7,500 .28426 2131.95

10 7,500 .24718 1853.85

11 7,500 .21494 4836.15

12. 7,500 .18691 4205.475

13 7,500 .16253 3656.925

14 7,500 .14133 3179.925

15 7,500 .12289 2765.025

16 7,500 .10686 2404.35

17 7,500 .09293 2090.925

18 7,500 .0808 1818

19 7,500 .07026 1580.85

20 7,500 .0611 1374.75

NPV= 20553.15

PV= Actual dollar benefit times INF.

Since NPV is positive, so the project should be accepted