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Unformatted text preview: 1 Event 8 – Inflation Lessons 16 A businessman is considering the purchase of an asset that has an initial cost of $2000. The salvage value for the asset in 10 years is $400. The asset promises an annual return of $600. Its operating cost is $100 the first year, $150 the second, and increases by $50 in each subsequent year. These values are estimated in today's prices. The estimated cash flow is below. Assumptions regarding inflation and escalation The general inflation rate is 5%. The salvage value is escalating at a 9% rate. Returns for the project escalate at a rate of 10%. The operating costs will change at the same rate as general inflation. The businessman’s real MARR is 20%. Problem Except for part 10, compute numeric results with calculators or Excel. Do not use the add-in. For necessary formulas see Lesson 16, Inflation. 1. Compute the Market MARR: ___________________ 0.20 + 0.05 + (0.20)(0.05) = 0.26 or 26% Note that the terms Market MARR and Actual MARR mean the same thing. mean the same thing....
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- Spring '10
- salvage value, NPW