Question

In an effort to reduce pipe breakage, water hammer, and product agitation, a French chemical company plans to install several chemically resistant pulsation dampeners. The cost of the dampeners today is €125,000, but the chemical company has to wait until a permit is approved for its bidirectional port-to-plant product pipeline. The permit approval process will take at least 2 years because of the time required for preparation of an environmental impact statement. Because of intense foreign competition, the manufacturer plans to increase the price only by the inflation rate of 4% each year. Determine the cost of the dampeners in 5 years in terms of (a) then-current euros and (b) constant-value euros?
The cost of dampeners in terms of then-current euros is_________ € .

The cost of dampeners in terms of constant-value euros is______ € .

Answer 1

Answer:

a)  €152081.6128

b)  €125000

Explanation:

a) The cost of dampners in terms of then-current euros :

current cost x(1 + inflation rate)ⁿ where n is the number of years.

Since the price of dampners is expected to increase only by 4% per year from the current price of €125,000 in 5 years:

We calculate : 125000 (1+0.04)⁵ = €152081.6128

The cost of dampeners in terms of then-current euros is €152081.6128

b) The cost of dampners in terms of constant value will remain as at today's current price if the value of Euros remains constant . Therefore, The cost of dampeners in terms of constant-value euros is €125,000.