Question

Ever Forward Athletics is considering a proposal to the corporate headquarters to offer employee training in several plants in Northern California. The training would reduce labor and other operating costs at those plants.

The combined income statement for the plants under consideration are as follows (in thousands):

Revenues	$8,500
Costs:
Direct labor	4,400
Supplies	200
Indirect labor	1,200
Utilities, taxes, etc.	600
Lease – office space	800
Computer hardware and software	600
Miscellaneous	120
Marketing	450
Administration	380
Net income	-250

-The costs are expected to continue in the future unless the training is obtained.

-The training is expected to reduce direct labor by 25% and indirect labor by 20%. No other costs are expected to be affected by the training. The training will cost $4,000,000 will be paid to the North Central Region at the beginning of the training process. Assume a five-year time horizon.

-If the company’s after-tax cost of capital is 12%, determine whether the new training should be offered. Show supporting computations.

Required: use as much space as you need.

Would you recommend Ever Forward's program to the managers of the plants in Northern California? Support your conclusions with your calculations. You must use the NPV function in Excel to calculate the present value of the annual cash flows. Include your spreadsheet with your recommendation.

Answer 1

Particulars	0	1	2	3	4	5
Cash Outflow	$ 4,000,000	0	0	0	0	0
Cash Inflow
Saving in direct labour cost		1,100,000	1,100,000	1,100,000	1,100,000	1,100,000
Saving in indirect labour cost		240,000	240,000	240,000	240,000	240,000
Total		1,340,000	1,340,000	1,340,000	1,340,000	1,340,000
PV factor (cost of capital = 12%)		0.892857	0.7972	0.7118	0.6355	0.5674
PV of Cash inflow		1,196,428.38	1,068,248	953,813	851,570	760,316
Total	4,830,374.38
NPV	830,374.38

Yes, I recommend Ever Forward's program to the managers of the plants in Northern California. Because the NPV is positive that means the saving in cost in 5 years is more than the cost of training. The training program helps the plant workers to work more efficiently.