QUESTION: Should I hire 3 new employees or take the money and invest it in a municipal bond at 6% for three years?
Assumptions: 1. The $54,000 cost to the company for the three new employees is on a per employee basis, with a total cost to the company of $162,000 for the three month period for the three new employees.
2. A 90% success rate with new employees and an average term of employment of five years means that nine of 10 new employees hired will still be with the company five years from the date of hire.
3. The $12,500 in earnings for the company that will be generated by $2 million in mortgages originated is in addition to the $7,500 in commissions that will be generated for the employees.
4. Municipal bond interest is free of federal income tax liability.
5. The company is liable for 38% federal income tax on earnings.
To answer this question, it is necessary to (1) determine the net present value of the earnings for the company that will be generated by the three employees over the three year period, (2) determine the net present value of the future value of the investment in municipal bonds, and (3) compare the two net present values.
(1) Determination of the net present value of the earnings for the company that will be generated by the three employees over the three year period:
Year PVIF(6%) Cost Earnings Earnings x .9 Present Value
0 1.0000 162,000 162,000.00
1 0.9434 337,500 303,750 After federal ...