A company is planning to invest $75,000 (before taxes) in a personnel training p

Question

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 forms of greater productivity and less employee turnover are as follows (on an after-tax basis): Years 1-10: $7,500 per year Years 11-20: $22,500 per year The company has estimated its cost of capital to be 15percent. 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. Based on the net present value criterion, should the firm undertake the training program

Explanation / Answer

The company will undertake the training program if NPV is positive and reject the project if NPV is negative. the NPV can be calculated as : $8,214.41 NPV is negative , So the company will not accept the training program. no need to consider the marginal tax rate as all the cash flows are given as after tax basis .

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