Question

Jackson State University is evaluating two options. It can perform online distance learning upgrades now for $275,000 or it can defer for 5 years when the cost is expected to increase to $375,000. Economist expects a real MARR of 10% per year with an average inflation rate of 4%. Using the FUTURE WORTH ANALYSIS, determine if the Mayor should purchase now or later:

Answer 1

Answer:

The answer for (a)$442,890 for (b) $364,023.5

Explanation:

From the question, the first set to take is to determine if the Mayor should purchase now or late when,

(a)When inflation is not considered

(b)When inflation is considered

(A) When inflation is considered

Future worth analysis (FWA) = 275, 000 (i +1)^5

=275,000 (1.10)^5

= $442,890

Thus, since FW > $375,000,

The cost of future is less, the Mayor should purchase later.

(B) When inflation is considered

Real rate = ( 1 + nominal/1 +inflation)^-1 = 1.1/1.04 -1 = 0.057 = 5.77

FW = 275,000 (1 +i)^5 = 275,000 (1.0577)^5

=$364,023.5

So FW< 375,000

Because the worth of buying or purchasing is less, the mayor should purchase now