A firm manufactures and sells high quality business priters and ink toners. Each

Question

A firm manufactures and sells high quality business priters and ink toners. Each printer sells for $650 and each toner for $100. The average user keeps the priter for 5 years and consumes 4 toners every year. in response to a recent significant drop in printers sales( which will reduce future toner sales as well) the firm wants to lower the priter price to $500. Assume that income from toner sales occurs at year end and the firm's cost of capital is 10%. How much of an increase is needed in the toner price to cover the loss in priter price?

Explanation / Answer

decrease in printer price = 600-500 = $150

so the toner should cover this $150 for one printer

cost of capital is given as 10%

present value of annuity @ 10% for 5years =3.80

so the present value of returns from toners= 4toners x 100 x 3.80=$1520

(per year toners sale is $400 i.e 4toners @100 )

if we take the present price of printer=650

total inflows = 1520+650 = $2170

now printer price =$500

so remaining defieciency =2170-500=$1670 should be covered by sale of toners

being usage per year and cost of capital is same, the equation will be 4 x A x 3.80 = 1670

where A is the price of toner

A =109.86

so the price of toner should be increased by $9.86 or approximately $10

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