Question

a. You are in the market for a new refrigerator for your company’s lounge, and you have narrowed the search down to two models. The energy-efficient model sells for ¢1,700 and will save you ¢45 in electricity costs at the end of each of the next five years. The standard model has features similar to the energy-efficient model but provides no future saving in electricity costs. It is priced at only ¢1,500. Assuming your opportunity cost of funds is 6 percent, which refrigerator should you purchase? b. You are the human resources manager for a famous retailer and are trying to convince the president of the company to change the structure of employee compensation. Currently, the company’s retail sales staff is paid a flat hourly wage of ¢20 per hour for each eight-hour shift worked. You propose a new pay structure whereby each sales- person in a store would be compensated ¢10 per hour, plus 1 percent of that store’s daily profits. Assume that, when run efficiently, each store’s maximum daily profits are ¢25,000. Outline the arguments that support your proposed plan.

Answer 1

(a) The energy efficient model cost is ¢1700 and this energy model will give savings of ¢45 at each year for next 5 years.

Another standard model cost is ¢1500 and this will not give any savings in energy cost.

Opportunity cost of fund is 6%. It will be the interest rate.

Net PW(Present worth) cost of energy efficient model is

¢1700 - ¢45(P/A, 6%,5)

= ¢1700 - ¢45*[{(1+i)^n - 1}/{i(1+i)^n}]

= ¢1700 - ¢45*[{(1+0.06)^5 - 1}/{0.06(1+0.06)^5}]

= ¢1700 - ¢45*4.2123

= ¢1510.44 = ¢1510(approx).

The Net PW cost of energy efficient model is ¢1510 and price i.e cost of standard model is ¢1500.

As the cost of standard model is less(¢1500) than the cost of efficient model (¢1510). There should purchase the standard model. (Ans).

(b). Current pay structure of company's retail sales staff is ¢20 per hour for 8 hours of work.

The human resource manager proposes pay structure of ¢10 per hour plus 1 percent of company's daily profit.

Here maximum profit the company can do when run efficiently is ¢25,000. 1% of this profit is ¢25.

So, when company run efficiently the pay structure of the staff will be ¢10 +¢25 = ¢35.

Now, this pay structure of incentive based or profit share based is fruitful for the company. Because -

I) When the company will run efficiently i.e when the company will be in good position staff will get good payment and they will get interest to do work.

II) When the staff will be paid on the basis of company's profit the target of the employee will be work hard so that company can earn for which they will be also paid for better situation of the company via profit share.

III) When they will be paid on the basis of that they will be paid less amount when the company will be not in good situation. But if they paid fixed amount their payment is not related to company's performance.

IV). When staff will get payment according to some basic payment plus profit share then staff will be part of this company's performance. They will be internal part of company's profit. They will know that if they perform less efficiently company can make less profit and as a result they will be paid less.

V) When they will be paid fixed amount then they may think that they will be paid their whatever be the company's situation. They will have less interest in company's better situation and bad situation. It is always better to internalise them via the pay structure.