A tobacco company is interested in hiring a salesperson to promote smoking cigarettes in nightclubs. The position pays a flat salary of $50,000, regardless of sales levels. The firm has two applicants, Predictable Patty and Risky Ricky. Predictable Patty can produce with 100% certainty $100,000 a year in sales. Risky Ricky, on the other hand, can produce $300,000 with probability of 50%. But if he turns out to spend his time drinking and dancing in the nightclubs instead of making sales, he could actually cost the firm -$100,000 per year. a) During their first year on the job, what are the expected sales of Patty and Ricky? What are the firm’s expected profits on each worker? b) Now assume both
Solve the following problem using an excel spreadsheet. A tobacco company is
interested in hiring a salesperson to promote smoking cigarettes in nightclubs. The position pays a flat salary of $50,000, regardless of sales levels. The firm has two applicants, Predictable Patty and Risky Ricky. Predictable Patty can produce with 100% certainty $100,000 a year in sales. Risky Ricky, on the other hand, can produce $300,000 with probability of 50%. But if he turns out to spend his time drinking and dancing in the nightclubs instead of making sales, he could actually cost the firm -$100,000 per year.
a) During their first year on the job, what are the expected sales of Patty and Ricky? What are the firm’s expected profits on each worker?
b) Now assume both workers are currently 25, and they will work until the retirement age of 65. The firm has the option to fire its new employee after one year based on sales, but can only hire one employee. Assume that it takes only one year to discover whether Ricky is productive or not, and that he will remain that way for his lifetime. The firm’s discount rate for future profits is fixed at 10 percent over the life of both workers. Which employee should it hire?
c) Now relax the assumption that each employee will stay with certainty until he or she reaches age 65. Assume, instead, that each year the chances that a worker will leave the firm, given he/she has not left to date, are 20 percent (i.e. the firm’s expected turnover rate for these sales positions is 20 percent per year). Which employee should it hire now?
d) Use your spreadsheet program to increase the firm’s discount rate higher and higher above 10 percent. What happens to its expected present value of profits for each worker? Do the same for the turnover rate. What happens in each case to the firm’s decision regarding which of the two workers to hire? Why?
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