Reconsider the lecture example regarding Middletown Community College. The colle
ID: 2510786 • Letter: R
Question
Reconsider the lecture example regarding Middletown Community College. The college has decided not to rent vending machines but instead to buy them. X Company will sell machines to Middletown and promises to buy them back in four years. Assume that Middletown's annual profit equation for the snack operation is $0.11(X) - $67,800, where X is the number of snack items sold. Middletown expects to sell 780,000 snack items in each of the next four years. X Company is willing to negotiate the purchase price with Middletown, but it promises to purchase the machines back in four years for $2,000. Assuming Middletown wants a 7% return on this investment, what is the most they can pay for the vending machines?
Explanation / Answer
profit can be earned = 780000*.11-67800=$18000
salvage value of asset =$ 2000
total profit to be earned= $20,000
lets say A to be the paid amount for machinery
then company wants 7% return on investment
=> A * 7%= 20000
=> A = 20000/7%= $ 285,714.29
=> machinery to be purchase value of $ 285,714.29/-
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