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 five years. Assume that Middletown's annual profit equation for the snack operation is $0.11(X) $72,700, where X is the number of snack items sold. Middletown expects to sell 770,000 snack items in each of the next five years. X Company is willing to negotiate the purchase price with Middletown, but it promises to purchase the machines back in five years for $2,500. Assuming Middletown wants a 7% return on this investment, what is the most they can pay for the vending machines? Submit Answer Tries 0/3

Explanation / Answer

Profit equation 0.11 X -72700 Number of units (X) 770000 Annual profits 12000 Annuity factor for 5 years at 7% 4.1002 Present of profits 49202.4 Add: Present value of buy back 1782.5 ($ 2500 * PVF at 7% i.e. 0.713) Present value of inflows 50984.9 Thus, the atmost price paid should be $50985

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