XYZ manufacturing company wants to determine whether it should upgrade a class o

Question

XYZ manufacturing company wants to determine whether it should upgrade a class of machines now or later. If the company selects plan A, the upgrade will be purchased now for $200,000. However, if the company selects plan B, the purchase will be deferred for 3 years when the cost is expected to rise to $300,000. XYZ expects a real MARR of 12% per year. The inflation rate in the country has averaged 3% per year. From only an economic perspective, determine whether the company should purchase now or later (a) when inflation is not considered and (b) when inflation is considered

Explanation / Answer

First of all let's find nominal interest rate

(1+reat rate)=(1+Nominal rate)/(1+inflation rate)

(1+0.12)=(1+nominal rate)/(1+0.03)

1.12*1.03 = 1+ nominal rate

Nominal rate =1.1536-1

Nominal rate = 15.36%

Thus if we consider real interest rate it is better to opt plan A otherwise plan B

Particulars MARR = 12% MARR = 15.36% Expected cash flow after 3 years 300000 300000 PVIF 0.711780248 0.651379757 Present value of cash outflow 213534 195414

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