Reference no: EM13851313

A tobacco company is interested in hiring a salesperson to promote smoking cigarattes in nightclubs. The position pays a flat salary of $50,000, regardless of sales levels. The firm has two applicants, predictable Patty and Risky Ricky. Predictable Patty can produce with 100% certainty $100,000 a year in sales. Risky Ricky, on the other hand, can produce $300,000 with a probability of 50%. But fi he turns out to spend his time drinking and dancing in the nightclubs instead of making sales, he could actually cost the firm $100,000 per year. *may want to use Excel spreadsheet to help solve this problem*

A. During their first year on the job, what are the expected sales of Patty and Ricky?

B. Now assume both workers are currently 25, and they will work until retirement age of 65. The firm has the option to fire its new employee after one year based on sales, but can only hire one employee. Assume that it takes only one year to discover whether Ricky is productive or not, and that he will remain that way for his lifetime. The firm’s discount rate for future profits is fixed at 10% over the life of both workers. Which employee should it hire?

C. Now relax the assumption that each employee will stay with certainty until he or she reaches age 65. Assume, instead that each year the chances that a worker will leave the firm, given he/she has not left to date, are 20% (i.e. the firms expected turnover rate for these sales positions is 20% per year). Which employee should it hire now?

D. Use your spreadsheet program to increase the firm’s discount rate higher and higher above 10%. What happens to its expected present value of profits for each worker? Do the same for the turnover rate. What happens in each case to the firm’s decision regarding which of the two workers to hire? Why?