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Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor,...

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Finance

Young screenwriter Carl Draper has just finished his firstscript. It has action, drama, and humor, and he thinks it will be ablockbuster. He takes the script to every motion picture studio intown and tries to sell it but to no avail. Finally, ACME studiosoffers to buy the script for either (a) $10,000 or (b) 1 percent ofthe movie’s profits. There are two decisions the studio will haveto make. The first is to decide if the script is good or bad; thesecond is to decide if the movie is good or bad. First, there is a90 percent chance that the script is bad. If it is bad, the studiodoes nothing more and throws the script out. If the script is good,it will shoot the movie. After the movie is shot, the studio willreview it, and there is a 60 percent chance that the movie is bad.If the movie is bad, the movie will not be promoted and will notturn a profit. If the movie is good, the studio will promoteheavily; the average profit for this type of movie is $14.2million. Carl rejects the $10,000 and says he wants the 1 percentof profits.

What is value of accepting 1 percent of the profits? (Donot round intermediate calculations and round your answer to thenearest whole number, e.g., 32..)

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