Question

1. A layoff is expected to have an immediate restructuring charge of $7,500 and save money for the firm according to the schedule below.   The firm’s weighted average cost of capital is 11 percent (which may be used as the discount rate for average-risk investments).

Year Cash Inflows

1   $4,375

2   $ 0

3   $8,750

4   $4,100

2. A layoff is expected to have an immediate restructuring charge of $7,500 and save money for the firm according to the schedule below. The firm’s weighted average cost of capital is 11 percent (which may be used as the discount rate for average-risk investments). Year Cash Inflows 1 $4,375 2 $ 0 3 $8,750 4 $4,100 3. Productivity training for a firm’s employees should produce cost savings from productivity increases of $1,750 a year for four years. The training initially costs $10,600. The firm’s weighted average cost of capital is 13 percent (which may be used as the discount rate for average-risk investments).

**MAINLY BENEFIT COST RATIO

Answer 1

Q - 2

Cost = 7,500

Benefit = PV of all the future savings

= 4,375 / (1 + 11%) + 0 / (1 + 11%)2 + 8,750 / (1 + 11%)3 + 4,100 / (1 + 11%)4 =  13,040

Hence, benefit cost ratio = Benefit / Cost =  13,040 / 7,500 = 1.74

Q - 3

Benefit = PV of cost savings from productivity increases of $1,750 a year for four years = A / r x [1 - (1 + r)-n] = 1,750 / 13% x [1 - (1 + 13%)-4] = 5,205

Cost = 10,600

Hence, benefit cost ratio = benefit / cost = 5,205 / 10,600 = 0.49