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 $0.09(X) - $58,300, 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 $2,000. Assuming Middletown wants a 8% return on this investment, what is the most they can pay for the vending machines?

Explanation / Answer

Annual cash flows = (770000*0.09)-58300= $11000 Present value of annual cash flows 43923 =11000*3.993 Present value of salvage value 1362 =2000*0.681 Maximum amount for the vending machines 45285

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