70.2K

Verified Solution

Link Copied!

4. Estimating Variable Consideration (5 points) King Pest Control, Incorporated was recently hired to exterminate pests in an office complex for $300,000. King will receive an additional $10,000 based on the success of the extermination. The additional $10,000 will be paid in full if the extermination is fully successful after one month. That amount will be decreased to $8,000 if the extermination is successful after two months and further reduced to $5,000 if successful after three months. Based on past experience with similar contracts, King estimates that there is a 20% probability that the process will be successful with the first month, a 75% probability that it will take two months to be successful, and a 5% probability that the process will be effective after three months. Required: a. Determine the transaction price for this contract using the expected value approach. (3 points) b. Determine the transaction price for this contract using the most-likely-amount approach. (2 points) 5. Time Value of Money (10 points) Square One Inc. is currently using a discounted cash flow model. Scenario 1: Cash flows are fairly certain Scenario 2: Cash flows are uncertain $480/year for 5 years 75% probability that cash flows will be $480 in 5 years Risk-adjusted discount rate is 8% 25% probability that cash flows will be $220 in 5 years Risk-free discount rate is 3% Risk-adjusted discount rate is 8% Risk-free discount rate is 3% Required: Identify which model Squire One Inc. might use to estimate the discounted fair value under each scenario, and calculate the fair value. (Note: For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round final answers to 2 decimal places, e.g. 5,275.25.) (10 points)

Answer & Explanation Solved by verified expert

See Answer