Question

year	CPI
0	110
1	130
2	145
3	170
4	150
5	110

The annual fuel costs required to operate a small solid-waste treatment plant are projected to be $3 million without considering any future inflation. The best estimates indicate that the
annual market interest rate (i) will be 8%. You can find the general inflation rate for each year based on the below table which presents the CPI values over the years (year 0 to year 5). If the plant has a remaining useful life of five years, what is the present equivalent of its fuel costs? You must use actual-dollar analysis (i.e. you must first find the actual dollar values for each annual constant dollar amount). Otherwise, you will not be given any credits.

Answer 1

Year	0	1	2	3	4	5
CPI	110	130	145	170	150	110
Inflation %		18.18%	11.54%	17.24%	-11.76%	-26.67%	(finding growth rate in CPI)
Fuel costs	3.0000	3.5455	3.9545	4.6364	4.0909	3.0000	(Applying growth rates to fuel costs)
Present value factor	1.0000	0.9259	0.8573	0.7938	0.7350	0.6806	(Discount factors using rate = 8%)
(using rate as 8%)
PV (fuel costs)	3.0000	3.2828	3.3904	3.6805	3.0069	2.0417	(Multiplying discount factors and fuel costs)
NPV	18.4024						(sum of PV(fuel costs))
(sum of PV(fuel costs))