1. Mike’s Veneer Shop owns a vacuum press that requires annual maintenance. Mike

Question

1. Mike’s Veneer Shop owns a vacuum press that requires annual maintenance. Mike has a contract to cover the maintenance expenses for the next five years. The contract calls for an annual payment of $600 with adjustment each year for inflation. Inflation is expected to hold constant at 6%/yr over this period. The cash flow pattern for this expense in actual dollars is best described by which of the following?

(a) uniform/equal payment series
(b) linear gradient series
(c) geometric gradient series
(d) continuous series

Explanation / Answer

Geometric Series

Here the cash flows each year will increase by the inflation rate. Therefore, payment next year will be:

Payment next year = Current payment x (1+r)

Where the constant ratio is 1+r and initial amount is current payment.

This is the characteristics of a geometric sequence; therefore the correct answer would be Geometric Series

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