Question

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)?

Answer 1

Guess that the CSR Initiative will increase the Shareholder value by 80$ per Hour. (It is an Estiation).

The CSR Initiative will increase the shareholder value by 30 $ per Hour (It is a certainity).

The cost of the initiative is 20$ per hour for the first 2 Hours. 50$ per Hour for the next two hours and 80 $ per Hour after that.

a)

Year	Cost	Certain Benefit	Share Holder Value	Cumulative share holder value change
1	20$	30$	Increment of 10$	Increment of 10$
2	20$	30$	Increment of 10$	Increment of 20$
3	50$	30$	Loss of 20$	No change
4	50$	30$	Loss of 20$	Loss of 20$
5	80$	30$	Loss of 50$	Loss of 70$
6	80$	30$	Loss of 50$	Loss of 120$
Total	300$	180$

Initiative of exact 2 Hours will result in Increase of 20$ in Share holder Value as per the above assumptions.
Initiative of more the 3 Hours will result in decrease in Share holder Value as per the above assumptions.
Initiative of exact 3 Hours will result in no change in Share holder Value as per the above assumptions.
Initiative of less than 3 Hours will result in decrease in Share holder Value as per the above assumptions.
Initiative of 4 Hours will result in decrease of 20$ in Share holder Value as per the above assumptions.

b)

Year	Cost	Estimated Benefit	Shareholder Value
1	20$	80$	Increment of 60
2	20$	80$	Increment of 60
3	50$	80$	Increment of 30
4	50$	80$	Increment of 30
5	80$	80$	No Change in Shareholder Value
6	80$	80$	No Change in Shareholder Value80$
Total	300$	480$	180$

If he kept him invested in the initiative for 4 Hours he will get 180$, as per the above table.
No matter for how long he is invested in the initiative, he will get 180$ increment in the shareholder value.

c) So I am staying invested for 4 years in the initiative to get increment in shareholder value of 180$, as per the assumption of estimate benefit of 80$ per hour.
But if I take the assumption of certain benefit of 30 $ per hour and I am staying invested for 4 years in the initiative.
I will lose 30$ of my Shareholder Value.

d) every scenario is explained in the above questions