Question

1. As the owner of a small business, you are considering whether you should pay for a short training program for your workers or not. The supplier of the training tells you that your workers will become much more efficient, generating cost savings worth $10,000 each year for the next five years. The cost of the training program, if offered today, is $35,000. The training company tells you that this is a no-brainer, meaning that you should not think much about it since the $35,000 investment today will save you $50,000 over a period of five years. However, based on your MBA Economics course, you decide to make your decision more carefully, based on a net present discounted value calculation, with an interest rate of 10% currently available to you. What would be your decision: buy the training for $35,000 or not? Please explain

Answer 1

Question

Cost of the training program = $35,000

Interest rate = 10%

Time period = 5 years

Annual saving = $10,000

Calculate the net present value -

NPV = -Cost of the training program + Annual savings (P/A, i, n)

NPV = -$35,000 + $10,000(P/A, 10%, 5)

NPV = -$35,000 + [$10,000 * 3.791]

NPV = -$35,000 + $37,910

NPV = $2,910

The net present value of the training program project is $2,910.

A project is profitable and feasible when its net present value is positive otherwise not.

The net present value of the training program project is positive.

So,

We should buy the training for $35,000.