A 10-Year Project Is Evaluated Under Two Scenarios: (I)with Inflation

Question

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The Answer is If we define first cost as P and annual revenue as A then the present worth of the project without inflation can be written as follows:
-P + A * (P/A, 10%, 10)+ P * (1 - 0.13)10 * (P/F, 10%, 10)= 24 254
When inflation is present, we need to calculate actual interest rate:
0.1 + 0.02 + 0.1 * 0.02 = 0.122 or 12.2%
20% reduction in the project's PW produces 0.8 * 24 254 = $19 403.20
Therefore, the PW of the project with inflation can be written as:
-P + A * (P/A, 12.2%, 10)+ P * (1 - 0.13)10 * (P/F, 12.2%, 10)= 19 403.20
As a result, we have two equations with two unknowns P and A. Solving them as a system, we can find that P = $28 103.30

A 10-Year Project Is Evaluated Under Two Scenarios: (I)with Inflation

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