1.You have been asked to compute the effect of capitalizing recruiting and training expenses at a consulting firm. You are told that the company generated 12 million in pre-tax operating income in the most recent year, after 20 million in recruiting and training

expenses. Employees stay with the firm, on average, for 3 years and you are given the following information on recruiting and training expenses for the last three years (prior to the most recent year).

Year

Recruiting and Training Expenses

-1

16 million

-2

14 million

-3

10 million

a.Assuming that you capitalize recruiting and training expenses, estimate the corrected pre-tax operating income for this year.

b.If you capitalize recruiting and training expenses, what effect will it have on your free cash flow to the firm for this year?