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.
What will be an ideal response?
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.
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