Question

Problem 3 (5 points/20) An oil company is interested in purchasing five pumps to transport oil over a 1000 km distance. Currently they have pumps that cost, C, of $50,000 per pump in 2019, with cost index I. of 600. Economic data shows that the cost index for pumps is likely to rise to 740 in 2024 as a result of inflation and currency values. How much should the company plan to have in budget to afford the five pumps in 2024. Hint: Cn = cx4

Answer 1

The cost per pump in 2019 = $ 50,000

To know how much the company should plan to have in budget in 2024 to buy 5 pumps, the cost of the pumps should be adjusted for inflation by using the appropriate cost indexes.

The cost per pump in 2024 is calculated as follows

C2024 = C2019 (42024 2019

C2024 = $50,000 (400) 600

Cost per pump in 2024 = $ 61,666.67

To afford five pumps, the company should have a budget = $ 61,666.67 x 5 ( $ 308,333.35)

Thus the company should plan to have a budget of $ 308,333.35 to afford the five pumps in 2024.