A government data processing center has been plagued in recent years by complaints from employees of back
Question:
A government data processing center has been plagued in recent years by complaints from employees of back pain. Consultants have estimated that upgrading office furniture at a net cost of $430,000 would reduce the incidence and severity of back injuries, allowing the center to avoid medical care that currently costs $68,000 each year. They estimate that the new furniture would also provide yearly benefits of avoided losses in work time and employee comfort worth $18,000. The furniture would have a useful life of five years, after which it would have a real scrap value equal to 10 percent of its initial net cost. The consultants made their estimates of avoided costs assuming that they would be treated as occurring at the beginning of each year.
In its investment decisions, the center uses a nominal discount rate of 9 percent and an assumed general inflation rate of 3 percent. It expects the inflation rate for medical care will be either 3 percent, the same as other goods, or 6 percent. Should the center purchase the new furniture?
Discount RateDepending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Step by Step Answer:
Cost-Benefit Analysis Concepts and Practice
ISBN: 978-1108401296
5th edition
Authors: Anthony E. Boardman, David H. Greenberg, Aidan R. Vining, David L. Weimer