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A company is planning to invest $100,000 (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):

Years 1-10: $10,000 per year
Years 11-20: $22,000 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?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M944119

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