(Please only answer e)
- You expect a CSR initiative to increase the firm's reputation, but the benefits are hard to quantify.Your best guess is that the initiative will increase shareholder value by $80 for every hour that is put into the initiative, but you can only definitely show that there will be $30 an hour worth of benefits. The cost of the initiative is $20 per hour for the first two hours, $50 per hour for the second two hours, and $80 per hour for every hour after that.
A. If your manager decides to only invest in the initiative to the point that he is certain shareholder value will be increased, then how many hours will be invested in the initiative?
B. What if the manager instead decides to go with your estimated benefits?
C. If your estimated benefits are correct then you should act on your answer to part B (i.e., operate under your estimated benefits). In this case, how much shareholder value is lost if the firm decides to act only on the definitive benefits (i.e., dedicated the number of hours in part A)?
D. Now instead assume that your estimated benefits are wrong and the true benefits are only the $30 per hour that can be definitively shown. How much value is lost if you act as if your estimated benefits are correct (i.e., overinvest in CSR)?
E. Assume you are choosing to dedicate the number of hours solved for in Part A or the number of hours solved for in part B. Also assume that the true benefits to CRS are either $80 per hour as you estimate or $30 per hour as you can prove. How confident would you have to be in your estimated benefits to make acting as if your estimates are true the value maximizing decision (i.e., how confident would you have to be to make the expected payoff from the number of CSR hours you solved for in part B higher than the payoff from the number of hours you solved for in part A)?
part e is what I am struggling with
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