2. AG Construction enters into a contract with a customer to build a new headquarters facility for $1,000,000 on January 1, 2023 with a performance bonus of $100,000 if the building is completed by July 31, 2023. The bonus is reduced by $20,000 each week that completion is delayed. AG commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2023 65% August 7, 2023 25% August 14, 2023 5% August 21, 2023 5% a. Calculate the contract price for AG using the probability-weighted (expected value) method. b. Assume that AG can only determine the probabilities of completing the project by July 31 (65%) or not meeting the deadline (35%). Calculate the contract price under this scenario.
2. AG Construction enters into a contract with a customer to build a new headquarters facility for $1,000,000 on January 1, 2023 with a performance bonus of $100,000 if the building is completed by July 31, 2023. The bonus is reduced by $20,000 each week that completion is delayed. AG commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2023 65% August 7, 2023 25% August 14, 2023 5% August 21, 2023 5% a. Calculate the contract price for AG using the probability-weighted (expected value) method. b. Assume that AG can only determine the probabilities of completing the project by July 31 (65%) or not meeting the deadline (35%). Calculate the contract price under this scenario.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Qw.149.
Transcribed Image Text:2. AG Construction enters into a contract with a customer to build a new
headquarters facility for $1,000,000 on January 1, 2023 with a performance
bonus of $100,000 if the building is completed by July 31, 2023. The bonus is
reduced by $20,000 each week that completion is delayed. AG commonly
includes these completion bonuses in its contracts and, based on prior
experience, estimates the following completion outcomes:
Completed by Probability July 31, 2023 65% August 7, 2023 25% August 14,
2023 5% August 21, 2023 5%
a. Calculate the contract price for AG using the probability-weighted
(expected value) method.
b. Assume that AG can only determine the probabilities of completing the
project by July 31 (65%) or not meeting the deadline (35%). Calculate the
contract price under this scenario.
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