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# Analysis of a Salary Scenario

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An internal study at Mimeo Corporation; a manufacturer of low end photocopiers, revealed that each of its workers assembles 3 photocopiers per hour and is paid \$3 dollars for each assembled copier. Although the company does not have the resources needed to supervise the workers, a full time inspector verifies the quality of each unit produced before a worker is paid for his or her output. You have been asked by your supervisor to evaluate a new proposal designed to cut costs. Under the plan, workers would be paid a fixed wage of \$8 per hour. Would you favor the plan? Explain.

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Solution:

Currently employees average income per hour is \$9 (calculated \$3 x 3 photocopiers). So initially it would appear that the firm is saving money my switching to a flat salary of ...

#### Solution Summary

Fixed Salary versus Variable Salary

Analysis of two possible salary scenarios. Quantitative versus qualitative factors.

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## Analysis: Time Value of Money Scenarios

1. Dr. I. N. Stein has just invested \$6,250 for his son (age one). The money will be used for his son's education 17 years from now. He calculates that he will need \$50,000 for his son's education by the time the boy goes to school. What rate of
return will Dr. Stein need to achieve this goal?

2. Betty Bronson has just retired after 25 years with the electric company. Her total pension funds have an accumulated value of \$180,000, and her life expectancy is 15 more years. Her pension fund manager assumes he can earn a 9 percent return on her assets. What will be her yearly annuity for the next 15 years?

3. Larry Davis borrows \$80,000 at 14 percent interest toward the purchase of a home. His mortgage is for 25 years.
a. How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis for ease of computation. We will get a reasonably accurate answer.)
b. How much interest will he pay over the life of the loan?
c. How much should he be willing to pay to get out of a 14 percent mortgage and into a 10 percent mortgage with 25 years remaining on the mortgage? Assume current interest rates are 10 percent. Carefully consider the time value of money. Disregard taxes.

4. Sue Sussman started a paper route on January 1, 1998. Every three months, she deposits \$500 in her bank account, which earns 4 percent annually but is compounded quarterly. On December 31, 2001, she used the entire balance in her bank account to invest in a contract that pays 9 percent annually. How much will she have on December 31, 2004?

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