Effective Annual Rate You have been charged with putting together a redundancy package for a departing executive. The executive has asked for the following:

(1) The present value of the next two years’ lost pay. The executive’s current annual salary is £120,000 and a historical salary growth is 5 per cent per annum.

(2) £100,000 for reputation and non-disclosure contract.

(3) £20,000 non-competition agreement.

If the effective annual interest rate is 6 per cent, what is the size of the settlement? If you were the departing employee, would you like to see a higher or lower interest rate?