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Inflation

Smooth-Top is a British Columbia manufacturer of desktops. They are considering an increase of their capacity. Consulting engineers have submitted two routes to accomplish this: (1) install a new production line that would produce wood desktops finished with hardwood veneer and (2) install a new production line that would produce wood desktops finished with simulated wood made from hard plastic.

Smooth-Top is concerned about the price of hardwood veneer. They believe the price of veneer will rise over the next 10 years. However, they believe the price of veneer-finished desktops will rise by less than the rate at which the price of veneer rises. Information about the two potential projects are in the table in the attached file.

a) Compute the present worth of each option under the assumption that the real price of hardwood-finished desktops and real cost of hardwood veneer do not change (rather than as stated in the table). Assume zero inflation.

b) Compute the present worth of each option under the assumption that the real price of hardwood-finished desktops and the real value of hardwood veneer desktop operating costs increase as indicated in the table. Assume that inflation is expected to be 2% over the study period.

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Compute the present worth of each option.

$2.19