The CEO Has Decided To Plan For A Salary Action

The CEO has decided to plan for a salary action affecting a number of

The CEO has decided to implement a salary adjustment plan targeting specific groups within the organization over a two-year period. The plan involves providing a $2,000 cost-of-living increase to all hourly employees and a $4,000 increase to software analysts earning less than $55,000 annually. To facilitate this, the CEO requires a financial projection of how much to invest today to fund these raises. The task involves two options:

  1. The first option is to determine the lump sum amount that must be invested today at a 6% annual interest rate compounded quarterly, which would grow sufficiently over two years to cover the salary increases.
  2. The second option is to calculate the total amount that needs to be invested through equal monthly payments, considering a 3% annual interest rate compounded monthly, to reach the same funding goal after two years.

Additionally, a detailed data analysis must be conducted using a provided spreadsheet. This involves creating a new worksheet named “DB Calculations” where criteria ranges are established to identify all hourly employees and software analysts earning less than $55,000. Using Excel’s Advanced Filter feature, these groups are extracted for analysis. The DCOUNT function then calculates the number of employees in each category, which are multiplied by their respective salary increases to determine the total funding needed for the salary adjustments.

Furthermore, the calculated funding amount is used in conjunction with business algebra formulas and Excel functions such as PV (Present Value) and PMT (Payment) to compute the necessary lump sum and monthly payment investments. The calculations include applying the compound interest formulas for both investment options:

  • A = P(1 + i )^n for lump sum growth
  • FV = PMT * [(1 + i)^n – 1] / i for future value of periodic payments

Finally, a paragraph comparing the two investment strategies should be added, discussing the relative advantages and disadvantages of lump sum versus regular payments, considering factors such as interest rates, investment risk, and cash flow flexibility.

Paper For Above instruction

The task of determining the necessary investment for funding employee salary increases over a two-year horizon involves both data analysis and financial calculation components. As the CEO plans to incrementally increase salaries for specific employee groups, it is crucial to accurately identify these groups using Excel tools combined with sound financial principles to ensure adequate funding is secured through the right investment strategy.

First, the data analysis phase involves utilizing the provided dataset to identify hourly employees and software analysts earning less than $55,000. Creating a dedicated worksheet called “DB Calculations,” the process begins by setting criteria ranges for each group—for example, one for all hourly employees and another for analysts with salaries below $55,000. Using the Advanced Filter feature in Excel, these subsets are extracted for detailed analysis. The DCOUNT function counts the number of employees in each group, and these counts are then multiplied by the respective salary increases—$2,000 for hourly employees and $4,000 for qualifying analysts. The sum of these products yields the total funds necessary to implement the salary adjustments.

Once the total funding requirement is established, the next step is to determine the present value of this amount for both investment options. For the lump sum investment, the relevant formula is the present value calculation based on compound interest: A = P(1 + i)^n, where P is the initial investment, i is the interest rate per period, and n is the number of periods. Rearranged, this allows solving for P, the initial lump sum needed today to grow to the required amount over two years at a 6% interest rate compounded quarterly. Using Excel’s PV function, this calculation is simplified by inputting the future value, interest rate per period, and total periods.

In contrast, the monthly payment option involves a series of equal payments made over 24 months to reach the same future value. The formula applied here is FV = PMT * [(1 + i)^n – 1] / i, where PMT is the periodic payment, i is the monthly interest rate, and n is the total number of payments. Solving for PMT indicates how much must be paid monthly to reach the funding goal at a 3% annual interest rate compounded monthly, using Excel’s PMT function for accuracy and convenience.

Comparing these two options reveals underlying trade-offs. The lump sum investment offers the advantage of a one-time initial outlay that can grow unencumbered over the period, potentially yielding higher returns if managed correctly. However, it requires a significant upfront capital and assumes the availability of such funds. Conversely, the monthly payment approach provides more flexibility and better cash flow management, spreading out the financial burden over time. It also mitigates risk related to market fluctuations, as smaller, regular contributions can adapt more easily to changing economic conditions.

From an organizational and financial strategy perspective, the choice between these methods depends on the company's liquidity position, investment appetite, and risk tolerance. A lump sum investment might be preferable if the company has sufficient cash reserves and seeks to maximize returns with minimal ongoing commitments. Conversely, the installment method suits firms aiming to preserve liquidity and manage cash flows carefully, especially if market conditions are uncertain or if there is variability in future revenue streams.

References

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