A certain machine will have a cost of $25,000 (then $) six years from now. Find the PW of the machine if the real interest rate is 10% per year and the inflation rate is 5% per year using (a) constant-value dollars, and (b) then-current dollars.

The Present Worth of the machine if the real interest rate is 10% per year and the inflation rate is 5% per year, using:

(a) constant-value dollars

= $10,518.60

(b) then-current dollars

= $10,818.65

Explanation:

a) Data and Calculations:

Cost a certain machine six years from now = $25,000

Time period = 6 years

Real interest rate = 10%

Inflation rate = 5%

Nominal interest rate = 5% (10% - 5%)

Discount factor at 10% for 6 years = 0.564

Discount factor at 5% for 6 years = 0.746

PW using:

a) Constant-value dollars = $18,650 ($25,000 * 0.746)

PW = $10,518.60 ($18,650 * 0.564)

b) Then-current dollars:

The nominal rate = 0.1 + 0.05 + (0.1 * 0.05) = 0.155

$10,818.65 ($25,000 * 0.432746)

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