Reference no: EM131169433
An employee has been offered a 5 year contract for a position at a company. They offered 3 different payment terms and asked you to decide your preferred option.
Option 1(Fixed Salary): $75,000 per year with no annual raises
Option 2(Increasing Salary): $65,000 for the 1st year with annual raises of 5% starting in Year 2
Option 3(Irregular Salary): The company has offered to pay ou a salary to reflect the position's intensity. They will give you $2000 signing bonus today, $60,000 in the 1st year, $80,000 in the 2nd year, $50,000 in the 3rd year and $70,000 in the last two years of the contract.
Assume, initalliy that the salary is paid only at end of year and the interest rate is 9% compounded annually.
a) Draw the cash flow diagram for each option.
b) Which of the three options are best?
c) If each of these options are to be paid 2 times per month in equal installments,instead of the initial 1 time a year, what would be the equivalent equal bimonthly payments that you would receive under each option?
d) You estimated that your living expensives to be $3,400 per bimonthly pay period. What minimum annual salary would you need to receive (assume you are paid bimonthly payments) to cover these expenses, assuming the interest rate stays the same?
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