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Jordi Referren was seeking a professional soccer contract in Europe. He has been offered a 3-year...

Jordi Referren was seeking a professional soccer contract in Europe. He has been offered a 3-year contract with Stripe Albion football club whereby his contract will be based on whether the club makes the finals in their local soccer league this year in Monrovia. The likelihood of this happening is 32.5%. The annual contract from Stripe Albion is either $800 000 if they make the finals or $400 000 if not successful.

Jordi has also been offered a 3-year contract with White Rovers football club whereby his contract will be based on whether the club makes the finals, makes the grand final or wins the overall championship in Turmenistan. The annual contract from White Rovers is based on amounts of $325 000 if they do not make the grand final, $410 000 if they make the grand final and lose and $900 000 if they win the overall championship. The likelihood of not making the grand final is 60%, making and losing the grand final of 30% and making and winning the grand final of 10%.

Required:

Advise Jordi, based only on the financial information provided, which of the club contracts he should accept.

Solutions

Expert Solution

1. Expected cash flow from Stripe Albion Football Club = likelihood of reaching Final * Cash Flow when finals are reached + likelihood of not reaching Final * Cash Flow when finals are not reached

Expected cash flow from Stripe Albion Football Club = 32.50% * 800000 + 67.50% * 400000

Expected cash flow from Stripe Albion Football Club = $530000

2. Expected cash flow from White Rovers = likelihood of not reaching Final * Cash Flow when finals are not reached + likelihood of reaching Final but losing * Cash Flow when finals are reached but lost + likelihood of reaching Final and winning * Cash Flow when finals are reached but won

Expected cash flow from White Rovers = 60% * 325000 + 30% * 410000 + 10% * 900000

Expected cash flow from White Rovers = $408000

Conclusion: Jordi should accept the contract of Stripe Albion football club as hey offer higher expected cash flow

*Please comment if you face any difficulty and please don't forget to thumbs up

jeff jeffy answered 1 year ago
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