Question

An oil refinery is willing to install a 60,000-lb/hour pump for $325,000 in 2020 when the...

An oil refinery is willing to install a 60,000-lb/hour pump for $325,000 in 2020 when the pump index had a value of 500. the refinery must also install another pump of the same size in 2024. Economic data shows that the pump index is forecast to rise by 5% annually.

What is the approximate cost of a new pump in 2024?

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Answer #1

If the pump index raises by 5% annually, the value of the pump index in 2024 is found as follows/

Pump index in 2024 = 500 (1 + 0.05)4 = 607.753125

Approximate cost of a new pump in 2024 = ( Pump index in 2024 Pump index in 2020 ) Cost of the pump in 2020

Approximate cost of a new pump in 2024 = ( 607.753125   500 ) $ 325,000

Approximate cost of new pump in 2024 = $ 395,039.53

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