You have been offered a contract for six years to set up an overseas manufacturing plant to make and distribute Australian T-shirts. If you accept the offer, the following conditions will apply:
 

1) You will receive a once-off payment of $5,000 on the signing of the contract.

2) You will receive an annual salary of $120,000 for the first two years; $150,000 for the next two years; and $180,000 for the remaining two years. This salary will be paid quarterly in equal amounts, the first being paid three months after the signing of the contract.

2) If you generate sales in excess of $1,000,000 in any one year, you will receive a bonus of $10,000 at the end of that year (31st December). You consider there is a 25% probability that you will achieve the bonus in any one year.

If you sign the contract, you will do so today, 1st January 2009. You can ignore all taxes.

1) Draw a timeline of these cash flows.

2) What is the value of the contract to you today if the effective interest rate is 12% pa? (Remember to adjust the interest to an effective quarterly rate, where applicable.)

3) You decide to save 30% of all payments you receive during the six years and at the end of the six years you place these savings into a savings account at 6% pa. You will use these savings to help pay for your parents retirement home. You expect them to be in the home for 20 years and you will make 20 equal annual withdrawals to pay the home.

What will be the size of the annual withdrawals (the first being on the first day after the end of the contract) if you wish to have $100,000 left in the account after 20 years?

Answer rating: 100% (QA)

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