A manufacturing company purchased electrical services for the next 5 years to be paid for with $70,000 now. The service after 5 years will be $15,000 per year beginning with the sixth year. After 2 years service the company, having surplus profits, requested to pay for another 5 years service in advance. If the electrical company elected to accept payment in advance, what would each company set as a fair settlement to be paid if (a) the electrical company con- sidered 15% compounded annually as a fair return, and (b) the manufactur- ing company considered 12% a fair return?
A manufacturing company purchased electrical services for the next 5 years to be paid for with $70,000 now. The service after 5 years will be $15,000 per year beginning with the sixth year. After 2 years service the company, having surplus profits, requested to pay for another 5 years service in advance. If the electrical company elected to accept payment in advance, what would each company set as a fair settlement to be paid if (a) the electrical company con- sidered 15% compounded annually as a fair return, and (b) the manufactur- ing company considered 12% a fair return?
Algebra and Trigonometry (6th Edition)
6th Edition
ISBN:9780134463216
Author:Robert F. Blitzer
Publisher:Robert F. Blitzer
ChapterP: Prerequisites: Fundamental Concepts Of Algebra
Section: Chapter Questions
Problem 1MCCP: In Exercises 1-25, simplify the given expression or perform the indicated operation (and simplify,...
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The answers are NOT 102456.85 and 109193.11
Transcribed Image Text:40.
A manufacturing company purchased electrical services for the next 5 years
to be paid for with $70,000 now. The service after 5 years will be $15,000 per
year beginning with the sixth year. After 2 years service the company, having
surplus profits, requested to pay for another 5 years service in advance. If the
electrical company elected to accept payment in advance, what would each
company set as a fair settlement to be paid if (a) the electrical company con-
sidered 15% compounded annually as a fair return, and (b) the manufactur-
ing company considered 12% a fair return?
Expert Solution
SAnswer a
Net Present Value of Initial Option with 15% rate = -94999.20292
Refer the table below for details of calculation.
Present Value of the New Option (of Advance payment after year 2) (with 15% Rate)
= Initial Cost + Present Value of Advance at Year 3
= -70,000 + Advance / (1+0.15) 3
Net Present Value of Initial Option with 15% rate = Present Value of the New Option (of Advance payment after year 2) (with 15% Rate)
-94999.20292 = -70,000 + Advance / (1+0.15) 3
Advance = (-94999.20292 + 70,000 ) x (1.15) 3
= -38,020.66274
~ = -$38,020.66
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