The salon is considering hiring another person to blow hair. The person would co

Question

The salon is considering hiring another person to blow hair. The person would cost the salon an additional $18,000 / year in salary and benefits. If there is high demand, they anticipate making an additional $25,000 in net revenue. If there is low demand, they could lose $10,000 off of last year’s total net revenues. Because the city of Denver is growing, Mr K Joe thinks that there will be a 70% chance of “a lot of customers” and a 30% chance of “fewer customers”. Assume if Mr K doesn’t expand he will have the same revenue as last year.

Question

1) Calculate NPV?

2) Based on the NPV, would you recommend hiring a person?

Yes or No and why?

Explanation / Answer

1-Cash inflow due to hiring of the person=$25,000*0.7-$10,000*0.3 (There is 70% chance of earning $25,000 and 30% chance of loosing $10,000)= 14,500

NPV=-18,000+14500=-3500

2- NPV is negative so the person should not be hired.

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