Question

Nix-it Pest Control, Incorporated was recently hired to exterminate an office complex for $280,000. Nix-twill receive an additional S7,000 based on the success of the extermination. The additional $7,000 wil be paid in full if the extermination is fuly successful after one month. That amount will be decreased to $5,000 if the extermination is successful after two months and $2,000 if successful after three months. Based on past experience with similar contracts, Nix- it estimates that there is a 24% probability that the process will be successful ith the one-month pen a 55% p ability that it wil take two months to be successful and a n 21% probability that the process wil be effective after three months. Read the requirements. Requirement a. Determine the transaction price for this contract using the expected value approach. The transaction price for this contract using the expected value approach is $

Answer 1

Answer: $ 2,84,850

Determine the transaction price for this contract using the expected value approach.
Months	Amount($)	Probability	Amount * Probability($)
1 Month	7,000	24%	1,680
2 Month	5,000	55%	2,750
3 Month	2,000	21%	420
Expected value of additional receipt			4,850
Fixed component of transaction price			2,80,000
Transaction price for this contract using the expected value approach			$2,84,850