CRT Consulting provides long-term IT implementation assistance to large corporate clients. Its model is to deploy a
Question:
CRT Consulting provides long-term IT implementation assistance to large corporate clients. Its model is to deploy a team of consultants to each client; and that team is headed by a supervising consultant who both manages the project and performs billable hands-on work as well.
Nikita Reinholt was assigned last year to the Kemand account on a 4-year project with six other junior consultants. With planning completed and the project set to begin next week, Nikita had come to realize that Consultant "A" would hurt the overall effort. Consultant A's technical skills were weak and his client interactions were confrontational.
Nikita knew that she could immediately hire Consultant "W" from a competitor, whereupon Nikita would fire Consultant "A." Consultant"W" had better technical skills, was a team player, and would be much better with the clients. Importantly, there was no doubt that CRT would earn the final year (Year 4) $150,000 on-time completion bonus from Kemand if "W" were on board, and would definitely not earn it were "A" to stay.
There were other complications and Sybil began making a list:
If "A" stayed:
- Nikita would spend much more time supervising "A" and would thus lose her own ability to bill Kemand $30,000 per year in years 1-4.
If Nikita fired "A" and hired "W:"
- Billings would rise in years 2, 3, and 4 as Kemand, pleased with the work of CRT, would give add-on assignments as shown on the template.
- CRT would have to pay "A" an immediate severance of $75,000.
- Additionally, there was a 60% chance that "A" would sue for discrimination. IF "A" sued, then CRT would pay a labor attorney $25,000 in Year 1 and $15,000 in Year 2; and would end up settling the suit by paying "A" $245,000 in year 2 (this would be in addition to the severance already paid). Importantly, the attorney fees would be tax deductible (as would the t=0 severance payment); but the Year 2 settlement payment would NOT be tax deductible.
Nikita set out to find an answer using a rational, quantitative approach. She was convinced that she could assess the incremental costs and benefits of firing "A", find an associated annual cash flow, discount those annual cash flows to the present, and then sum them up to get the NPV.
She laid out her analysis and started to fill in the numbers as shown on the
Given that the tax rate for CRT was 20% and that its WACC (discount rate) was 9%, what value did Nikita derive from the impacts of firing "A" and hiring "W" shown above (to the nearest thousand dollars)?