Question

The owners of a small manufacturing concern have hired a vice president to run the company...

The owners of a small manufacturing concern

have hired a vice president to run the company

with the 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.

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