Question

In an effort to reduce pipe breakage, water hammer, and product agitation, a French chemical company plans to install several chemically resistant pulsation dampeners. The cost of the dampeners today is €119,000, but the chemical company has to wait until a permit is approved for its bidirectional port-to-plant product pipeline. The permit approval process will take at least 2 years because of the time required for preparation of an environmental impact statement. Because of intense foreign competition, the manufacturer plans to increase the price only by the inflation rate of 7% each year. Determine the cost of the dampeners in 5 years in terms of (a) then-current euros and (b) constant-value euros?

The cost of dampeners in terms of then-current euros is €  .

The cost of dampeners in terms of constant-value euros is €  .

Answer 1

Inflation rate shows the rate at which the prices of goods and services increase or the rate at which the purchasing power of a currency decrease.

Here the supplier of machine will increase the price of machine only by the rate of inflation.

Cost of dampeners in 5 years -

(I) in terms of then current euros -

Current cost x (1 + inflation rate)^(time)

119000 x (1+ 0.07) ^ ( 5 )

= 166903.66

(ii) in terms of constant value euros -

If the value of euros remains the same as today then there will be no inflation and hence the cost will be same as today.

i.e. 119000