Results 1 to 2 of 2

Math Help - To find a fair price value

  1. #1
    cnewhook
    Guest

    To find a fair price value

    Here I'm trying to find out the how part on this! I know the answer is $69,321.93.
    Here's the question:
    A lathing machine would generate an additional $15,000 per year in profits at the end of each year for 10 years. The machine would also be sold at the end of the of the 10th year for $10,000.
    But what gets me is it's asking what would be the fair price to pay for this machine today, if money is worth 18% compounded semiannually.
    Follow Math Help Forum on Facebook and Google+

  2. #2
    MHF Contributor
    Joined
    Aug 2007
    From
    USA
    Posts
    3,110
    Thanks
    2
    What have you tried? The only dilemma on this one is the lack of perfect synchronization of the payments and the interest crediting. What would be most useful is a quick equivalency.

    \left(1 + \frac{0.18}{2}\right)^{2}\;=\;1.1881

    There you go, an equivalent annually compounded rate.

    Create v\;=\;\frac{1}{1.1881}

    Scope out the value: 15000*(v+v^{2}+...+v^{10})\;+\;10000*v^{10}

    I do not get the answer you provided. The given answer ignores the semi-annual compounding and simply is incorrect.

    Note: This is a nice number, but it really does not answer the question. If you paid EXACTLY what the machine is worth, there would be no benefit to buying it. If you do nothing, your prospects are zero. If you buy for exactly what it will earn you, your prospects are zero. A reasonable price would have to be something less than the value of the business it can generate. Why go into a 10-year venture with no expectation of profit?
    Follow Math Help Forum on Facebook and Google+

Similar Math Help Forum Discussions

  1. Replies: 2
    Last Post: December 5th 2011, 03:54 AM
  2. Replies: 0
    Last Post: August 12th 2011, 05:09 PM
  3. Setting a fair price
    Posted in the Business Math Forum
    Replies: 8
    Last Post: February 3rd 2011, 04:01 AM
  4. find the price
    Posted in the Algebra Forum
    Replies: 2
    Last Post: December 18th 2009, 02:42 AM
  5. When is a fair coin toss not fair?
    Posted in the Advanced Statistics Forum
    Replies: 3
    Last Post: November 12th 2008, 07:48 AM

/mathhelpforum @mathhelpforum