Ajay Patel, the general manager of the Grand River Flyers hockey team, is considering making a one year contract offer to Brett Hart a prolific goal scorer. Adding Hart to the team will have no effect on regular season sales since those tickets are already sold out. Harts effect will be to boost the teams chances of having a successful playoff season. Patel has estimated the incremental net cash flows (before considering Harts salary) of signing Hart as:
Incremental Net Cash Flow
Probability
$2,000,000
0.1
$3,000,000
0.3
$5,000,000
0.2
$8,000,000
0.2
$9,000,000
0.1
$10,000,000
0.1
Required:
a. What is the expected value of offering Hart a one year contract before considering his salary?
b. If Hart is offered $6,000,000, what is the probability the Flyers will at least breakeven on this contract?
c. Harts agent proposes Hart be paid either $5,000,000 or $2,000,000 plus 50% of the incremental net cash flow he creates. Based on expected value, which contract should the Flyers accept?