Question

Peabody Construction Company enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2018 with a performance bonus of $50,000 that will be paid based on the timing of completion (July 31, 2018). The amount of the performance bonus decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Peabody has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a 15% probability that it will be completed 1 week late (August 7, 2018), only a 10% probability that it will be completed 2 weeks late (August 14, 2018) and only a 15% probability that it will be completed 3 weeks late (August 21, 2018). What is the transaction price for this transaction?

Answer 1

Solution:

Working Note:

Bonus,if Completed on :

31st July ,2018 = 50,000 (Given)

7th Aug, 2018 = 50,000 - (10%*50,000)= 45,000 (as 1 week delay)

14th Aug, 2018 = 50,000 - (20%*50,000)= 40,000 (as 2 week delay)

21st Aug, 2018 = 50,000 - (30%*50,000)= 35,000 (as 3 week delay)