Question

The annual fuel costs to operate a small solid-waste treatment plant are projected to be $1.8 million, without consideration for any future inflation. The best estimated indicate that the annual inflation-free interest rate will be 7% and the general inflation rate 4%. If the plant has a remaining useful life of five years, what is the present equivalent value of its fuel costs, using actual-dollar analysis?

Answer 1

The present equivalent value of the fuel costs is approximately $1,269,072.59 using actual-dollar analysis.

Step-by-step explanation:

To calculate the present equivalent value of the fuel costs, we need to use the concept of present value. The present value formula is:

Present Value = Future Value / (1 + interest rate)^number of years

In this case, the future value is the projected annual fuel costs of $1.8 million for each of the five years. The interest rate is the inflation-free interest rate of 7%. So, the present equivalent value of the fuel costs, using actual-dollar analysis, is:

Present Value = $1.8 million / (1 + 0.07)^5

Calculating this, the present equivalent value of the fuel costs is approximately $1,269,072.59.