Question

McMillens palace is a large restaurant supply firm that dominates the local market. It does, however,...

McMillens palace is a large restaurant supply firm that dominates the local market. It does, however, have one main rival; Bruces Supplies. Because of this competition, McMillens earns a profit of $943 per year. It could however, cut its prices to cost, earn zero profits for 1 years and drive Bruces out of the market. If it does so, McMillens will start earning $972 in 2 years to infinity. The interest rate is 10 % per annum.

What is the present value of McMillens profit stream if it does not cut its prices? (Answer is 9430, how did they get that?)

What is the present value of McMillens profit stream if it does cut its prices? (Answer is 972000/121, how did they get that?)

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Answer #1

First years profit is $ 943.

If the firm does not reduce price then the firm will continue to earn a profit of $ 943 per year till infinity.

When the firm reduce the price to cost then the in year 1 the profit will be zero and second year onwards it would be $ 972 per year till infinity.

I feel the answer provided in the second question is $ 97200/11. Please check your answer. I have solved it using excel too got the same value. Please check it. Please help me it mean a lot to me. Please help I am in dire need of help. Contact if having any query thank you.

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