Business Proposal

[shawn99michaels]

Hi All,

I'm trying to finish this problem off


BUSINESS PROPOSAL

• A company currently has 1,000 advisers selling its life and savings products.
• It is considering expanding the number of advisers by 25%.
• It costs £100k to recruit and train an adviser.
• The full cost of each adviser including salary, bonus, car and other direct costs is £120k per annum.
• It takes 3 months to train an adviser once he/she starts, before they can be released to start selling.
• A fully productive adviser can produce £4m of new business premiums per annum.
• However, a new starter is only expected to produce £1m in the first year, £2m in year 2, £3m in year 3 and be fully productive from year 4.
• £1m pounds of sales premiums will produce a net of profit of 2% of sales premiums per annum

Assumptions:

• 15% of premiums in-force at the end of each year lapse (leave) in the following year.
• Inflation is 2.5% per annum.
• Premiums grow at 5% per annum net of charges.
• All 250 advisers are recruited at the same time and start on the same day.

This is what i've done as a solution below

	0	1	2	3	4	5	6	7	8	9	10
New Business Premiums	187.50	250.00	500.00	750.00	1,000.00	1,000.00	1,000.00	1,000.00	1,000.00	1,000.00	1,000.00
Costs Below Increase By 2.5% Per Annum From Year 2
Recruitment & Training Costs	(25.00)	-	-
Adviser Salaries	(30.00)	(30.75)	(31.52)	(32.31)	(33.11)	(33.94)	(34.79)	(35.66)	(36.55)	(37.47)	(38.40)
Premium Lapses	-	(28.13)	(37.50)	(75.00)	(112.50)	(150.00)	(150.00)	(150.00)	(150.00)	(150.00)	(150.00)
Premiums Net of Charges (increase of 5% p.a rom Year 2)	132.50	200.68	452.53	674.83	897.10	856.86	855.97	855.06	854.12	853.16	852.18
Net Profit (2% of Sales Premiums)	2.65	4.01	9.05	13.50	17.94	17.14	17.12	17.10	17.08	17.06	17.04

I just have two things I'm not sure of that I would like someone to confirm for me:

• The assumptions states that "Premiums grow at 5% per annum net of charges" i've therefore increased the net premium amounts by 5% instead of increasing the gross amount by 5%. The only thing is in all my years doing similar stuff i've always increased the gross amounts and no adjustments are made to net figures. Would be grateful if someone could please tell me that the assumption I have made is correct or not.
• "£1m pounds of sales premiums will produce a net of profit of 2% of sales premiums per annum" - I have taken this statement to mean that out of every £1m of net premium amounts (gross premium charges - salary training costs etc) is the net profit.

If anyone can please confirm my assumptions and please let me know if you spot any other errors in my calculations I will be ever so grateful.

Thank you