The company you work for signed a contract with a security firm to control access to company grounds and corporate offices. The contract amount was for $140,000 for the first year, renewable each year for up to a total of 5 years at the same cost plus a percentage increase equal to the inflation rate for the preceding year. Your boss asked you to calculate the expected cost in the final year of the contract (year 5), assuming the inflation rate is 3% for the next 3 years and 5% for the last one.
What will be an ideal response?
Cost, year 5 = 140,000(1 + 0.03)³(1 + 0.05)
= $160,631
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