Monday, December 10, 2012

W14_FELIX_SALARY BREAK EVEN POINT


1.      Problem Recognition, Definition and Evaluation
Sometimes we want to challenge ourselves to move from comfort zone and work for foreign company as professional engineer.  My friend have job offer for oversee engineer with excite profit and salary, however he have a condition that he will only work for determine duration, maximum 10 years and back to Indonesia for business. He need to evaluate his position so he can made good decision whether he will take the offer or not.

To help my friend I will evaluate and compare from economic point view specially total saving can be collect at current company until retired and compare it with how long he can BEP and how much expected salary If he accept the foreign job offering.

The objective of this study is to learn how to use engineering economy (PW, Break-even, Inflation, IRR) for financial planning.

2.      Development Feasible alternatives
There are two alternative:
a.       Accept the job offer
b.      Stay still at current Company.

3.      Development of the Outcome
First I will calculate the total saving at his current company until his retirement.
Retire age at his current company regulation is 55. Its mean my friend have 20 years remaining before retire. Annual salary (include bonus etc.) is $45.000.  Indonesian Inflation rate in the last 5 years was 6.04%.  Annual salary increase was 10%.  And normal saving is 1/4 from total annual salary.
With spirit for early saving I assume that he will take “safe” investment i.e. deposit with earn 7% annual rate.
Input Data :
 
.
4.      Selection of the acceptable criteria.
Based from above calculation, his saving will be total $1.071.681 at the start of retirement.  Even is look huge money, the real dollar at present value only worth $351,674.
The value of $351,674 becomes our point, where we can calculate the duration for BEP.
We also can calculate the expected salary.
 
5.      Analysis for the alternatives
Using Ms. Excel spreadsheet we can calculate the proposal as below table:
The condition to accept the job is, if the salary for maximum 10 year at oversea company was same as his work for his current company until he retired i.e. $351,674.  Using Excel Spreadsheet we can calculate as below table.
(Assume % salary to be save, annual salary increase, saving interest and average inflation rate is the same).
 
 
With Goal seek (excel function) we can find, the annual salary we expected is :
 
The BEP can be shown at below Chart :

6.      Select the preferred alternative
Based from above data we can conclude that if he can negotiate his expected salary minimum $ 9.514 or higher, than the job offer could be acceptable.
Working 10 years at overseas Company as Professional engineer have the same value for 20 years he working at his current company.


7.      Performance Monitoring & Post Evaluation of Result
This analysis was based from standard average salary at Oil & Gas Company in Indonesia for senior engineer. We can make financial plan using above analysis. And the interesting point is we also know that the average salary for 20 years working at Oil & Gas Company will have value around $350.000. Evaluation of these calculation can be challenge.

8.      Reference:
·         William G.Sullivan, and Elin M.Wicks (2012)  Engineering Economics-Fifteen Edition, chapter 8, Price Changes and exchange rates. London Pearson Education Ltd.
·         William G.Sullivan, and Elin M.Wicks (2012)  Engineering Economics-Fifteen Edition, chapter 11, Breakeven and Sensitivity Analysis. London Pearson Education Ltd.
·         Introduction to Break-even Point: Accounting Coach. Retrieved from http://www.accountingcoach.com/ online-accounting-course
·         Laporan Inflasi (Indeks Harga Konsumen) Bank Indonesia. Retrieved from http://www.bi.go.id/web/id/Moneter/Inflasi/Data+Inflasi/

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