[MuffinFlavored]

> Because the risk-free rate of return is now much higher, the net present value of the estimated future cash returns from that investment has gone down.

When the risk free rate was 0.25%, the net present value of estimated future cash returns was X

Now, the risk free rate (2 year) is 4.50%. A different of 4.25%, therefore the net present value of estimate future cash returns is whatever X was, but 4.25% worse

For a company like Microsoft, how does that translate to layoffs? If their project was profitable to the tune of 10% margins and the risk free rate makes it only 5%, why are they getting rid of the entire project?

Or, did they have projects that had 5% net margin, and now the projects are breakeven, so they get rid of them? That would mean the people who got laid off at Microsoft were almost unanimously working on projects that were only netting Microsoft 5% net margin? I thought tech had better margins than that?

[overrun11]

> If their project was profitable to the tune of 10% margins and the risk free rate makes it only 5%

The 5% needs to be weighed against the cost of capital, not just the absolute return from the company's perspective. A 5% return sounds fine but if the market is now pricing equities for a 7% return then a company is lighting money on fire by making that 5% investment (because they can return the cash to shareholders who can invest in other businesses at 7%).

[MuffinFlavored]

I don't understand.

Let's say it was hypothetically like this.

Microsoft

2019

Cost of capital: 0.25% (should be irrelevant because they had billions in cash on hand but let's assume they refuse to use it for whatever reason and instead went to banks to get loans to pay for employees working on projects)

They work on a project, it returns 20% gross. 20% - cost of capital = ROI of 19.75%

2022

Cost of capital: 4.50%

Project returns 20% gross still, but now the net ROI is 15.5%

Why would you lay off employees who could bring you 15.5% (average project profitability assumption?) in favor of instead parking your cash for the risk free rate of 4.5%?

[overrun11]

In that hypothetical I do not think they would necessarily do layoffs. The more likely scenario would be:

2019 Cost of capital: 7%, gross return 10% for 3% excess return

2022 Cost of capital: 12%, gross return 10% for -2% excess return

In which case that project would get cut and layoffs would occur.