Financial accounting

As an innovative way to pay for various software packages, a new hightechnology service company has offered to pay your company in one of three ways: (1) pay $400,000 now, (2) pay $1.1 million 5 years from now, or (3) pay an amount of money 5 years from now that has the same buying power as $750,000 now.

If you want to earn a real interest rate of 10% per year and the inflation rate is 6% per year, which offer should you accept?

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A regional infrastructure building and maintenance contractor is trying to decide whether to buy a new compact horizontal directional drilling (HDD) machine now or wait to buy it 2 years from now (when a large pipeline contract will require the new equipment). The HDD machine will include an innovative pipe loader design and a maneuverable undercarriage system. The cost of the system is $68,000 if purchased now or $81,000 if purchased 2 years from now.

At a real interest MARR of 10% per year and an inflation rate of 5% per year, determine if the company should buy now or later (a) without any adjustment for inflation and (b) with inflation considered.

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