Question - Sun Devil Corp. enters into a contract with a customer to build an apartment building for $1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $50,000 each week that completion is delayed. Sun Devil commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
Completed by: Probability
August 1 2018 70%
August 8, 2018 20%
August 15, 2018 5%
After Aug 15, 2018 5%
Determine the Transaction Price for this contract using the Expected Value approach?