Reconsider the lecture example regarding Middletown Community College. The colle

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) - $68,500, where X is the number of snack items sold. Middletown expects to sell 750,000 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 $3,500. Assuming Middletown wants a 8% return on this investment, what is the most they can pay for the vending machines?

Explanation / Answer

Annual net cash flows = (750000*0.11)-68500= $14000 Present value of annual cash flows 46368 =14000*3.312 Present value of salvage value 2573 =3500*0.735 Maximum amount to be paid for vending machine 48941 or $48940.50

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