Ferox Engineering Company intends to sign a contract obligating it to provide bridge inspection services for five years. In return, Ferox will receive $5,000 initially and $10,000 at the end of each of the five years of service. Ferox uses a 12% Discount rate. If the annual inflation rate will be 4%, what is the inflation-adjusted present value of the contract

$37,400

Explanation:

The computation of the inflation-adjusted present value of the contract is shown below:

Given that

At the zero year = $5,000

From 1st to 5th year = $10,000

Discount rate = 12%

Inflation Rate = 4%

Now

Adjusted discount rate is

= 12% + 4% + (.12 × .04)

= 16.48%

And,  

Present Worth is

= $5,000 + $10,000 (P/A, 16.48%, 5)

= $5000 + $10,000 (3.2358)

= $37,358

= $37,400

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