Answer to Question #294134 in Economics of Enterprise for Bugs

Question

Metalfab Pump and Filter Inc. estimates that the cost of steel bodies for pressure valves will increase by $2 every 3 months. If the cost for the first quarter is expected to be $80, what is the present worth of the costs for a 5-year time period at an interest rate of 1.86% per quarter?

Answer 1

Number of months

$4\times5=20$ months

Cost taking into account the increase:

$80+2\times20=80+40=120$

Current value:

$PV=\frac{FV}{(1+i)^{20}}$

$PV=\frac{120}{(1+0.0186)^{20}}=83.01$