A doctor is on contract to a medium-sized oil company to provide medical services at remotely located, widely separated refineries. The doctor is considering the purchase of a private plane to reduce the total travel time between refineries. The doctor can buy a used Learjet 31A now for $1.1 million or wait for a new very light jet (VLJ) that will be available 3 years from now. The cost of the VLJ will be $2.1 million, payable when the plane is delivered in 3 years. The doctor has asked you, his friend, to determine the present worth of the VLJ so that he can decide to buy the used Learjet now or wait for the VLJ. The MARR is 15% per year and the inflation rate is projected to be 3% per year. (a) What is the present worth of the VLJ with inflation considered? (b) Which plane
should he buy?
What will be an ideal response?
(a) The $2.1 million are then-current dollars. Use if to find PW
if = 0.15 + 0.03 + (0.15)(0.03) = 0.1845 (18.45%)
PWLear = 2,100,000(P/F,18.45%,3)
= 2,100,000[(1/(1 + 0.1845)3]
= $1,263,613
(b) He should buy the used Learjet, since $1.1 million is lower than PWLear
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