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Assume you own a professional sports team and are considering hiring a new coach who is famous for her one-of-a-kind risky strategy/style. If the risky coach's strategy works (probability 60%), FCFS will be $3 million higher than their usual level each year she's the coach. If the risky coach's strategy 40%), FCFs will be $1 million lower than usual while she's the coach. Also, if the fails (probability coach's strategy works/fails in year 1, it does the same in year 2, and no matter what, the coach is going to retire at the end of year 2. As soon as the risky coach retires (or is fired), FCFS return to their usual level. You are considering offering the coach two different 2-year contracts: Deal A states that you can fire her after year 1 with no penalty, and Deal B states that you can't fire her after year 1 no matter what (imagine there is a $100 million penalty for doing so). Assume you have to make contract offers that pay the coach her full expected value (given the contract design), and have the same salary in years 1 and 2. What should the coach's annual salary be in each deal? Note: for this problem, ignore the time value of money. Deal A $1.80 million/year, Deal B $2.10 million/year Deal A $1.40 million/year, Deal B $1.80 million/year Deal A $1.80 million/year, Deal B $1.25 million/year Deal A $1.60 million/year, Deal B $1.40 million/year

Assume you own a professional sports team and are considering hiring a new coach who is famous for her one-of-a-kind risky strategy/style. If the risky coach's strategy works (probability 60%), FCFS will be $3 million higher than their usual level each year she's the coach. If the risky coach's strategy 40%), FCFs will be $1 million lower than usual while she's the coach. Also, if the fails (probability coach's strategy works/fails in year 1, it does the same in year 2, and no matter what, the coach is going to retire at the end of year 2. As soon as the risky coach retires (or is fired), FCFS return to their usual level. You are considering offering the coach two different 2-year contracts: Deal A states that you can fire her after year 1 with no penalty, and Deal B states that you can't fire her after year 1 no matter what (imagine there is a $100 million penalty for doing so). Assume you have to make contract offers that pay the coach her full expected value (given the contract design), and have the same salary in years 1 and 2. What should the coach's annual salary be in each deal? Note: for this problem, ignore the time value of money. Deal A $1.80 million/year, Deal B $2.10 million/year Deal A $1.40 million/year, Deal B $1.80 million/year Deal A $1.80 million/year, Deal B $1.25 million/year Deal A $1.60 million/year, Deal B $1.40 million/year

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter1: Introduction To Cost Management
Section: Chapter Questions
Problem 4E: Consider the following thoughts of a manager at the end of the companys third quarter: If I can...
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Assume you own a professional sports team and are considering hiring a new coach who is famous for her one-of-a-kind risky strategy/style. If the risky coach's strategy works (probability 60%), FCFS will be $3 million higher than their usual level each year she's the coach. If the risky coach's strategy 40%), FCFs will be $1 million lower than usual while she's the coach. Also, if the fails (probability coach's strategy works/fails in year 1, it does the same in year 2, and no matter what, the coach is going to retire at the end of year 2. As soon as the risky coach retires (or is fired), FCFS return to their usual level. You are considering offering the coach two different 2-year contracts: Deal A states that you can fire her after year 1 with no penalty, and Deal B states that you can't fire her after year 1 no matter what (imagine there is a $100 million penalty for doing so). Assume you have to make contract offers that pay the coach her full expected value (given the contract design), and have the same salary in years 1 and 2. What should the coach's annual salary be in each deal? Note: for this problem, ignore the time value of money. Deal A $1.80 million/year, Deal B $2.10 million/year Deal A $1.40 million/year, Deal B $1.80 million/year Deal A $1.80 million/year, Deal B $1.25 million/year Deal A $1.60 million/year, Deal B $1.40 million/year
Transcribed Image Text:Assume you own a professional sports team and are considering hiring a new coach who is famous for her one-of-a-kind risky strategy/style. If the risky coach's strategy works (probability 60%), FCFS will be $3 million higher than their usual level each year she's the coach. If the risky coach's strategy 40%), FCFs will be $1 million lower than usual while she's the coach. Also, if the fails (probability coach's strategy works/fails in year 1, it does the same in year 2, and no matter what, the coach is going to retire at the end of year 2. As soon as the risky coach retires (or is fired), FCFS return to their usual level. You are considering offering the coach two different 2-year contracts: Deal A states that you can fire her after year 1 with no penalty, and Deal B states that you can't fire her after year 1 no matter what (imagine there is a $100 million penalty for doing so). Assume you have to make contract offers that pay the coach her full expected value (given the contract design), and have the same salary in years 1 and 2. What should the coach's annual salary be in each deal? Note: for this problem, ignore the time value of money. Deal A $1.80 million/year, Deal B $2.10 million/year Deal A $1.40 million/year, Deal B $1.80 million/year Deal A $1.80 million/year, Deal B $1.25 million/year Deal A $1.60 million/year, Deal B $1.40 million/year
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