Question 3: Inflation (10 marks) A computer engineering company is considering a

Question

Question 3: Inflation (10 marks) A computer engineering company is considering a 10-year contract to provide network services to the city of Kingston. The upfront set-up cost to the engineering company is $130,000. The contract pays year-end revenues in current/actual dollars of $40,000 for the first year, with increases of $5,000 each year thereafter; in other words $40,000 at the end of the first year, $45,000 at the end of the second, $50,000 at the end of the third year and so on. The company cannot estimate their periodic maintenance costs in current/actual dollars, but they know that based upon today's dollars, the maintenance costs will be $12,000 every three years. Assume these costs occur at end of every third year of the contract. The company requires a real MARR of 8%. Assume that inflation will average 2.78% per year for at least the next 15 years. a) Draw a well labeled cash flow diagram. Make sure that you identify each cash flow as real or actual. b) Determine the PW of the project. c) Based upon your analysis, should the company sign the contract? Justify your recommendation for full marks.

Explanation / Answer

Our happiness is relative. When we see ourselves better than others, we feel happier and when we see ourselves worse than others, we feel sad.

So, at any time, people with higher income will feel satisfied with his income and he will feel happy because he thinks he is living a better life than others. The same is true for those people in the poorer section. When these poor people see they are at the bottom of the income sections, they feel sad and they want to struggle more for a better income.

Now, when the aggregate income rises, there may or may not be a relative rise in income. So, there is no gurantee that happiness will increase overall. Human is a social animal, his happiness and other emotions depend on the society in which he is living.

I think that describes this odd combination of outcomes pretty we

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