Question

You need to replace a pump for the water system two years from now. The price of the pump is expected to be $50 000 plus $4 000 of installation costs. The inflation is assumed to be 5% in the first year and 4% in the second year. What is the cost of buying and installing the pump in real dollars?

Answer 1

Cost of buying the pump two years from now = Current price x ( 1+ inflation of 1st year) (1+inflation of second year)

cost of installing pump two years from now = Current price x ( 1+ inflation of 1st year) (1+inflation of second year)

Current price of pump= 50000$

Current price of installation cost = 4000

inflation in 1st year = 5% = 0.05

inflation in second year = 4% = 0.04

Cost of buying the pump two years from now = 50000 x ( 1+ 0.05) (1+0.04) = 54600$

cost of installing pump two years from now = 4000 x ( 1+ 0.05) (1+0.04) = 4368$