Question

A medium-size consulting engineering firm is trying to decide whether it should replace its office furniture now or wait and do it 1 year from now. If it waits 1 year, the cost is expected to be $14,500. At an interest rate of 15% per year, what would be the equivalent cost now

Answer 1

Answer:

The equivalent cost now for taking replacement decision of the furniture is $12,608.70

Decision: As the equivalent cost is less than the actual cost therefore the firm should repalce the furniture to minimise the replacement cost of the furniture in future.

Explanation:

If the furniture is to be repalced after one year then its equivalnet present value will be computed as follows:

$\begin{aligned}\text{Present Value}&=\frac{\text{Cost}}{1+\text{Interest rate}}*\text{Number of year}\\&=\frac{\ 14,500}{1+0.15}*1\\&=\ 12,608.70\\ \end{aligned}$