An executive-search firm has shown that job search time and higher salaries are

Question

An executive-search firm has shown that job search time and higher salaries are directly correlated. They have shown that for every $10,000 of additional compensation the search will take an additional month. Is a month spent in searching rather than earning income a good investment if it promises a return of $10,000 per year? Answer this question assuming that this additional $10,000 will run for five years and using a 6% discount rate to calculate its present discounted value. please show and explaing the mathematical process also!

Explanation / Answer

If a person spends one additional month in searching, he gives up his current income which is not given in this case. If that search earns him a return of $10,000 per year that runs for 5 years, then this investment is good only when the NPV of the return is greater than income sacrificed.

If the compensation after abstaining the salary of one month is $10,000, the the task is to find the present value (NPV) of $10000 at 6 percent annual interest rate or 0.5% per month for five years or 60 months for compounding monthly. Using the compound interest tables, we have,

NPV of 10000(P/F, 0.5, 60) = 10000*0.7414 = $7,414

Hence this investment is worth only if the income sacrificed is less than $7,414

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