Question

In: Accounting

A layoff in the Payroll Department is expected to have an immediate restructuring charge (from severance...

A layoff in the Payroll Department is expected to have an immediate restructuring charge (from severance package) of $83,000 and save money for the department according to the table immediately below. The firm’s weighted average cost of capital is 11 percent (which may be used as the discount rate for this and other average-risk investments).

Year Cash Flows
1 $2,275
2 $4,007
3 $6,750
4 $4,100


The Present Value of $1 Table (Table 3) tells us:

Period (n) Present Value Factor at 11% Discount Rate
1 .901
2 .812
3 .731
4 .659

Formulas:

Net present value = Present value of cash inflows – Present value of cash outflows

Benefit cost ratio = Present value of cash inflows
                              Present value of cash outflows

A) What is the Net Present Value (NPV) and Benefit Cost Ratio (BCR) of investing in this restructuring charge?



B) Do these measures support the layoff decision with its associated restructuring charge? Why or why not?

Solutions

Expert Solution

Answer:

A) Net Present value Calculation:

  Benefit cost Ratio calculation:

B)

  1. The firm should not support the layoff decision Because the Intial investment is not meeting even after the four periods and cash flow is also very low based upon the Present value factor @ 11%. And NPV (Net Present value) is showing Negative balance.
  2. TheBenefit Cost Ratio (Profitability Index) is also very low rate @ 0.155 . And Charge is too high where in return cash flows are too low it will take more time to get back your investment and You may lose your oppurtunity cost means another investment option which will may incurr you benefits.

ekkarill92 answered 2 years ago
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