Zerox Corporation, a manufacturer of office equipment, isheadquartered in Connecticut. Zerox stock (ZRX) is traded on allmajor exchanges. The price of common stock has languished in the$7-9 range, for the past several years. Annual sales are $18billion. Zerox has been subject to intense domestic and internalcompetition in recent years, especially in the Office CopierDivision (OCD). In response to the competition, OCD has changed themodels of the copiers more frequently. In the past, any of thecopier models were expected to remain in the market for 5 to 7years. In response to the competition, OCD is changing each modelin their product line every 3 to 5 years. This competitive tactichas increased market share. However, there has been a decline inproductivity of repairing machines that are in the field. TheRepair and Maintenance Operations (RMO) unit provided a detailedreport on declining repair productivity. Their findings state thatthe more frequent introduction of new copier models, to replaceexisting models, has created a lack of familiarity in repairingcopiers. The RMO report indicates that learning-by-doing hassuffered. Statistical models of the learning curve indicate a 20%decline in productivity because of the frequent introduction of newmodels. The current labor costs for field repair and maintenance is$7,000,000 annually and is expected to stay at that level forseveral years. TRAINING EDGE The OCD problem, as described above,was turned over to the Professional Training (PT) unit of Zerox. PThas responded with a program proposal called the Training Edge. Theproposal requires state-of-the-arts training for all field repairpersonnel. PT estimates that the Training Edge program willimmediately restore the 20% loss of labor productivity. In otherwords, if you accept the project the loss of productivity goesaway. Training Edge will require repair personnel to engage infive-day training programs annually to review the technical aspectsof new copier models. The program will include virtual realitylabs, physical repair labs, training videos, and manuals. Atraining center is also proposed at a site near corporate HQ, whichis owned by Zerox and managed my Zerox Land. The building iscurrently leased for $575,000 annually. Fortunately, the leaseexpires soon. The lease provides a five-year option to renew at$575,000 annually, but can be cancelled by either party. Zerox cancancel the lease, which would provide an excellent trainingfacility, though the current tenant would like to renew the lease.PT commissioned a study by Tonka Associates to considerretrofitting the building for training. The Tonka Associates studyindicates that the lab space, classroom space, etc. will cost$900,000 to retrofit the building. Tonka was paid $47,000 for thestudy. PT estimates that annual operating expenses for TrainingEdge are: Videos $40,000 Training Manuals 20,000 Instructors100,000 Instructional Material 5,000 Additionally,hotel-food-travel expenses for students visiting the trainingcenter from the several districts of OCD are estimated as $90,000annually. THE FINANCIAL DECISION OCD is delighted with the conceptof Training Edge. They have asked PT to develop a financialjustification for the program. OCD wants the proposal to cover onlythe next five years, since senior Zerox management intends to sellthe OCD at that time. The corporate tax rate is 35%. The trainingcenter building is fully depreciated. However, the retrofitting ofthe building is considered a capital improvement. It will bedepreciated over the next three years on a straight-linedepreciation basis. After "initial investments" today (retrofittingand so forth) all annual benefits and costs are assumed to occur atthe end of the year, for each year over five years. Training Edgeterminates at the end of five years and there are no salvage costs,etc., incurred at the end of the program. The required return forZerox is 16%.