Question

expectation that he will buy the company after five years. Compensation of the new vice president is a flat salary plus 75% of the first $150,000 profit, and then 10% of profit over $150,000. Purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years.

a. Plot the annual compensation of the vice president as a function of annual profit.

b. Assume the company will be worth $10 million in five years. Plot the profit of buying the company as a function of annual profit.

Answer 1

a. Plot the annual compensation of the vice president as a function of annual profit. Assuming a base salary of 100,0000, when profits are less than or 150,000, salary will be 100,000 + 75%*P where P is < or-150,000, when profits are greater than 150,000, salary will be 100,000 + 75%*150,000 + 10%"(P-150.000) where P > 150,000. In this manner we have tabulated the salary for the profits of0, 50,000 100,000 till 250,000. b. Assume the company will be worth S10 million in five years. Plot the profit of buying the company as a function of annual profit. The company after 5 years will be worth S10 million. The vice president will buy the company at a price which is 4.5 times her earnings (average annual profits for 5 years). Thus, the profit function for the vice president is 10 million 4.5*earnings. For average profits of S0.5 million, $1 million, S1.5 million and S2 million, the profit function of vice president is drawn below.