A regional infrastructure building and maintenance contractor must decide to buy

Question

A regional infrastructure building and maintenance contractor must decide to buy a new compact horizontal directional drilling (HDD) machine now, or wait and buy it 2 years from now when a large pipeline contract will require the new equipment. The HDD machine will include an innovative pipeloader design and a maneuverable undercarriage system. The cost of the system is $65,800 if purchased now or an estimated $80,700 if purchased 2 years from now.

At i = 12% per year and f = 5% per year, determine if the contractor should buy now or later with inflation considered.

The contractor should buy the drilling machine( ) for ($ )

Explanation / Answer

We need to use i= 0.05+0.12+(0.05)(0.12)=17.6%

F= 65800(F/P, 17.5%,2)= 65800(1+0.176)the power 2

=65800(1.382)=$90,936

Hence the contractor should buy the drilling machine later for $80,700

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