Assignment 2 Banking On A Beard Award

AssumptionsAll calculations pertain to time period of 3 yearsDiscounting of cash flow is not done to keep the calculations simpleProbability of failure of business and bankruptcy is 40%Probability of failure of business and breakeven is 20%Probability of modest success is 20%Probability of home run is 20%Probability of getting promoted in one year = ¼ = 0.25Probability of getting promoted in two year = 0.33*0.75 = 0.2475Probability of getting fired after two year = 0.33*0.75 =0.2475Considering maximum raise of 10% to be applicableIn home run, the restaurant business generates 40 percent profit in each yearThe various payoffs arePromotion after one year:Pay = 135000*1.25 + 135000*1.5 *1.25 +135000*1.5 *1.25*1.1 = $700312.5Promotion after two year:Pay = 135000*1.25 + 135000 *1.25*1.1 +135000*1.1*1.5 *1.25= $632812.5Fired after 2 yearsPay = 135000*1.25 + 135000 *1.25*1.1 = $354375Asked to stay in same positionPay = 135000*1.25 + 135000 *1.25*1.1 + 135000 *1.25*1.1*1.1= $558562.5BankruptCapital = 200,000Interest = 0.08*3*50000 + 0.12*3*50000 = 30,000The restaurant business does not run, hence payoff =- 230,000BreakevenSo, to break even, sales required