Two costs for construction of a small, remote mine are for labor and transportation. Labor costs are expected to be $350,000 the first year, with inflation of 6% annually. Unit transportation costs are expected to inflate at 5% annually, but the volume of material being moved changes each year. In Time-0 dollars, the transportation costs are estimated to be $40,000, $60,000, $50,000, and $30,000 in Years 1 through 4. The inflation rate for the value of the dollar is 3%. If the firm uses an i′ of 7%, what is the equivalent annual cost in Time-0 dollars for this 4-year project?
Two costs for construction of a small, remote mine are for labor and transportation. Labor costs are expected to be $350,000 the first year, with inflation of 6% annually. Unit transportation costs are expected to inflate at 5% annually, but the volume of material being moved changes each year. In Time-0 dollars, the transportation costs are estimated to be $40,000, $60,000, $50,000, and $30,000 in Years 1 through 4. The inflation rate for the value of the dollar is 3%. If the firm uses an i′ of 7%, what is the equivalent annual cost in Time-0 dollars for this 4-year project?
Chapter14: Capital Structure Management In Practice
Section14.A: Breakeven Analysis
Problem 8P
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Two costs for construction of a small, remote mine are for labor and transportation. Labor costs are expected to be $350,000 the first year, with inflation of 6% annually. Unit transportation costs are expected to inflate at 5% annually, but the volume of material being moved changes each year. In Time-0 dollars, the transportation costs are estimated to be $40,000, $60,000, $50,000, and $30,000 in Years 1 through 4. The inflation rate for the value of the dollar is 3%. If the firm uses an i′ of 7%, what is the equivalent annual cost in Time-0 dollars for this 4-year project?
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