Find the present worth of earthmoving equipment that has a first cost today of $150,000, an annual operating cost of $60,000, and a salvage value of 20% of the first cost after 5 years; these estimates being in future dollars. Assume the interest rate is 10% per year and that inflation has averaged 7% per year. Solve by hand and spreadsheet with inflation (a) not accounted for, and (b) accounted for.

Question

What will be an ideal response?

Answer 1

By hand:



(a) Inflation not considered uses i = 10%

PW = -150,000 – 60,000(P/A,10%,5) + 0.20(150,000)(P/F,10%,5)

= -150,000 - 60,000(3.7908) + 30,000(0.6209)

= $-358,821



(b) Inflation considered uses if

if = 0.10 + 0.07 + (0.10)(0.07)

= 17.7%



PW = -150,000 – 60,000(P/A,17.7%,5) + 0.20(150,000)(P/F,17.7%,5)

= -150,000 - 60,000(3.1485) + 30,000(0.44271)

= $-325,630



By spreadsheet: PW values and associated functions are shown.