Question

The cost of replacing a fleet of company trucks with more energy efficient vehicles was $100 million in 2016. The cost is estimated to rise by 8.5% in 2017. If the interest rate is 4%, what is the cost of a delay in terms of dollars in 2016?

A) $5.85 Million

B) $4.33 Million

C) $108.50 Million

D) $104.33 Million

Answer 1

New cost =Current cost*(1+% rise in cost)=100*(1+8.5%)=108.5 million

Present value of new cost=New cost/(1+rate of intrest)^number of discounting periods

=108.5/(1+.04)^1=104.33 million

Thus Cost of delay=Present value of new cost-Current cost=104.33-100

=4.33 million

Thus correct answer is  $4.33 Million