Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000 The plant will provide the company’s power needs for the next 20 years Hermo will use only 60% of the power output annually At this level of capacity Hermo’s annual operating costs will amount to $1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at an annual cost of $1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of capacity. This would reduce the estimated life of the plant to 14 years.
The maximum amount Quigley would be willing to pay Hermo annually for the power is