BenZema Co. is a leading real estate company in GCC region. BenZema Co. may undertake one of two available mutually exclusive projects in Bahrain Financial Harbor. The details of the projects are shown in the table below:

Project Name	Probability	Estimated Gross Profit
The Waterfront Project	33.33% (Recession times)	BD 10,000
	33.33% (Normal times)	BD 350,000
	33.33% (Boom times)	BD 950,000
Bahrain Bay Project	50% (Bad times)	BD 400,000
	50% (Good times)	BD 950,000

While LondonHouse Co. is a potential investor that will put their money into the project. Two possible compensation plans that the LondonHouse Co may choose to employ against the real estate firm: (i) a flat payment BD 75,000, or (ii) musharakah arrangement with the profit-sharing ratio of 90:10 (London Co : BenZema Co.)

You are required to answer the following questions:

1. For the WaterFront project, calculate the expected payoff for investor's (LondonHouse Co.) under flat payment scheme and profit-sharing scheme (2 marks).
2. For a Bahrain Bay project, calculate the expected payoff for investor's (LondonHouse Co.) under flat payment scheme and profit-sharing scheme (2 marks).
3. From Benzema's view, which project will be preferred? What compensation contract does the BenZema Co. prefer if the project is chosen? State your reason (1 mark)

Answer rating: 100% (QA)

To answer the questions we will calculate the expected payoffs for the investor LondonHouse Co under the flat payment scheme and profitsharing scheme ... View the full answer