17-4 Disposing of Used Assets Your company has a customer who is shutting down a

Question

17-4 Disposing of Used Assets

Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for possible future product and estimates that the reservation value is $250,000. Your dealings on the secondhand market lead you to believe that there is a 0.4 chance a random buyer will pay $300,000, a 0.25 chance the buyer will pay $350,000, a 0.1 chance the buyer will pay 400,000, and a 0.25 chance it will not sell. If you must commit to a posted price, what price maximizes profits?

Explanation / Answer

Probabilistic price=0.4*300000+0.25*350000+0.1*400000+0.25*0 247500 Reservation Value 250000 Since the probabilistic Price is almost equal to the Reservation Value , he should see the machine at 250000 .

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