9. H Corporation is considering a training program that cost $600,000. Anticipated benefits are $60,000 in the first year, $75,000 in the second year, $85,000 in the third year, and $95,000 in the fourth year. Benefits will decline 8 percent a year after the fourth year, and will end after the twelfth year. Assume these benefits are received at year-end. The effective required return is 6 percent. The net present value of this training project and is?

Question

9. H Corporation is considering a training program that cost $600,000. Anticipated benefits are $60,000 in the first year, $75,000 in the second year, $85,000 in the third year, and $95,000 in the fourth year. Benefits will decline 8 percent a year after the fourth year, and will end after the twelfth year. Assume these benefits are received at year-end. The effective required return is 6 percent. The net present value of this training project and is?

Answer 1

To calculate the net present value (NPV) of the training program, we need to compare the present value of the anticipated benefits to the present value of the program's cost.

Step 1: Calculate the present value of the anticipated benefits
We have benefits for four years and then a decline of 8% per year until the twelfth year. To find the present value of the benefits, we will discount each year's benefit at the effective required return of 6%.

Year 1 benefit: $60,000 * (1 / (1 + 0.06)^1) = $56,604.65
Year 2 benefit: $75,000 * (1 / (1 + 0.06)^2) = $66,580.50
Year 3 benefit: $85,000 * (1 / (1 + 0.06)^3) = $73,723.04
Year 4 benefit: $95,000 * (1 / (1 + 0.06)^4) = $79,620.07
Year 5 benefit: $95,000 * (1 / (1 + 0.06)^5) = $75,963.63 (8% decline from year 4)
Year 6 benefit: $95,000 * (1 / (1 + 0.06)^6) = $72,569.41
Year 7 benefit: $95,000 * (1 / (1 + 0.06)^7) = $69,423.71
Year 8 benefit: $95,000 * (1 / (1 + 0.06)^8) = $66,514.11
Year 9 benefit: $95,000 * (1 / (1 + 0.06)^9) = $63,828.46
Year 10 benefit: $95,000 * (1 / (1 + 0.06)^10) = $61,355.39
Year 11 benefit: $95,000 * (1 / (1 + 0.06)^11) = $59,083.98
Year 12 benefit: $95,000 * (1 / (1 + 0.06)^12) = $57,004.95

Step 2: Calculate the present value of the cost
The cost of the training program is $600,000.

Present value of cost: $600,000 * (1 / (1 + 0.06)^1) = $566,037.74

Step 3: Calculate the net present value
Now, we can sum up the present values of the benefits and subtract the present value of the cost to find the net present value.

NPV = Sum of present values of benefits - Present value of cost
= ($56,604.65 + $66,580.50 + $73,723.04 + $79,620.07 + $75,963.63 + $72,569.41 + $69,423.71 + $66,514.11 + $63,828.46 + $61,355.39 + $59,083.98 + $57,004.95) - $566,037.74

After calculating the values and subtracting, we get the net present value of the training project.

3480

To calculate the net present value (NPV) of the training program, we need to compare the present value of the anticipated benefits to the present value of the program's cost.