Jessica Barium is renovating her AUD 6 million mansion in Toorak. As a corporate lawyer of...
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Jessica Barium is renovating her AUD 6 million mansion in Toorak. As a corporate lawyer of a boutique investment bank in Melbourne, she is known to be a tough negotiator. As part of the renovation, the electrical wiring in the house needs to be replaced completely because it is old and dangerous. Bob Smart, a local electrician, offers to do the job for a flat AUD 120,000. Jessica finds Bob's offer excessive and makes a counteroffer. She offers to pay him AUD 60,000 now, and the remaining AUD 60,000 in four yearly payments of AUD 15,000 each. Bob Smart considers Jessica's counteroffer and calls his bank to see what interest rate he had to pay on any money that he would borrow from the bank. Trevor Clever, the bank manager, offers him an interest rate of 8.5% for any amount between AUD 10,000 and AUD 250,000 Bob had to borrow to do the electrical wiring job. In addition, if Bob increased the offer to do the job by at least AUD 10,000, Trevor would be willing to reduce the interest rate to 7.5% because Trevor expected this to better protect him against any potential credit loss from the job due to the higher margin. A. Should Bob Smart accept Jessica Barium's offer? How much better (worse) off would he be? (3 marks) B. By how much would Jessica Barium need to increase (decrease) her four yearly payments to match Bob Smart's original offer? (3 marks) C. Now assume that Jessica Barium modified her original counteroffer. She now offers to add one more payment of AUD 15,000 in year five, for a total payment of AUD 135,000. Should Bob Smart accept Jessica's revised offer? (3 marks) Jessica Barium is renovating her AUD 6 million mansion in Toorak. As a corporate lawyer of a boutique investment bank in Melbourne, she is known to be a tough negotiator. As part of the renovation, the electrical wiring in the house needs to be replaced completely because it is old and dangerous. Bob Smart, a local electrician, offers to do the job for a flat AUD 120,000. Jessica finds Bob's offer excessive and makes a counteroffer. She offers to pay him AUD 60,000 now, and the remaining AUD 60,000 in four yearly payments of AUD 15,000 each. Bob Smart considers Jessica's counteroffer and calls his bank to see what interest rate he had to pay on any money that he would borrow from the bank. Trevor Clever, the bank manager, offers him an interest rate of 8.5% for any amount between AUD 10,000 and AUD 250,000 Bob had to borrow to do the electrical wiring job. In addition, if Bob increased the offer to do the job by at least AUD 10,000, Trevor would be willing to reduce the interest rate to 7.5% because Trevor expected this to better protect him against any potential credit loss from the job due to the higher margin. A. Should Bob Smart accept Jessica Barium's offer? How much better (worse) off would he be? (3 marks) B. By how much would Jessica Barium need to increase (decrease) her four yearly payments to match Bob Smart's original offer? (3 marks) C. Now assume that Jessica Barium modified her original counteroffer. She now offers to add one more payment of AUD 15,000 in year five, for a total payment of AUD 135,000. Should Bob Smart accept Jessica's revised offer? (3 marks)
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To evaluate Bob Smarts decision regarding Jessica Bariums offer lets calculate the financial implications for him A Bob Smarts Counteroffer Bobs count... View the full answer
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