On April 1st, Bob the Builder entered into a contract of one-month duration to b

Question

On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,400 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 20% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 20% and the probability of finishing a week early is 65%.

a.5697

b. 5400

c. 5690

d. 5130

Explanation / Answer

solution:- option a.5697

The expected value of the transaction price is 5697

[5,400+(20% × 5400 × 20%) + (10% × 5400 × 65%) + (0% × 5400 × 10%)] = 5697

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.