9. While Doug is thinking about Norman's offer, Norman takes a call from his appraiser and...

 

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9. While Doug is thinking about Norman's offer, Norman takes a call from his appraiser and receives the news that, in the appraiser's expert opinion, the project would actually earn a one-year return of 22%, but if the building turns out to be worthless at the end of the year, Norman would not only lose all of his equity, but, should this happen, he would also need to pay the city a fine $F for the demolition of the building and environmental restoration of the site. Realizing that Doug has overheard the call, Norman becomes concerned that he will refuse to pay the $10,000,000.00 that Norman has requested. a. What amount of fine would just preserve Norman's original expectation of receiving a 20% payoff at the end of the year? b. Would Norman's concern be justified, based on his knowledge of Doug's behavior toward risk? c. Should the possibility of having to pay this fee be enough to convince Norman to lower his requested fee of $10,000,000.00 to sell the project rights? 9. While Doug is thinking about Norman's offer, Norman takes a call from his appraiser and receives the news that, in the appraiser's expert opinion, the project would actually earn a one-year return of 22%, but if the building turns out to be worthless at the end of the year, Norman would not only lose all of his equity, but, should this happen, he would also need to pay the city a fine $F for the demolition of the building and environmental restoration of the site. Realizing that Doug has overheard the call, Norman becomes concerned that he will refuse to pay the $10,000,000.00 that Norman has requested. a. What amount of fine would just preserve Norman's original expectation of receiving a 20% payoff at the end of the year? b. Would Norman's concern be justified, based on his knowledge of Doug's behavior toward risk? c. Should the possibility of having to pay this fee be enough to convince Norman to lower his requested fee of $10,000,000.00 to sell the project rights?

Answer rating: 100% (QA)

a The amount of fine needed to just preserve Normans original expectation of a 20 payoff at the end ... View the full answer