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You are the chief executive officer (CEO) for VTRules Inc. Your salary is currently up for renegotiation. The company's Board of Directors offers you a
You are the chief executive officer (CEO) for VTRules Inc. Your salary is currently up for renegotiation. The company's Board of Directors offers you a new 6-year contract that will pay you 2 million dollars one year from now and subsequent annual salary amounts that increase at the rate of 5 percent per year for the following 5 years. Assume the relevant discount rate is 7% per year. Answer the following questions. Clearly label the parts in your response. 1. What is the present value of the contract offer? State your answer and the particular "inputs" you used, e.g. N = 6.... in applying a formula or making calculator computations. (3 points) 2. What alternative 'flat salary' (constant annual salary with no growth) delivers the same present value over the same 6-year term? Again, state your key "inputs." (2 points) 3. Suppose you are able to renegotiate the proposed contract so that the same payment schedule is accelerated forward by exactly one year. To be clear, you receive the same number of payments and same payment amounts as in the original contract -- only the timing changes). By how much has this renegotiation increased the present value of your contract? (2 points)
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