ABE TUTORIALS

PROBLEM 28: ENGINEERING ECONOMY (TIME VALUE OF MONEY)

A FARMER IS TRYING TO DECIDE WHETHER TO BUY A NEW MACHINE NOW OR WAIT AND PURCHASE A SIMILAR ONE 4 YEARS FROM NOW. IF PURCHASED NOW, THE MACHINE WOULD COST P250,000. IF PURCHASED 4 YEARS FROM NOW, THE MACHINE IS EXPECTED TO COST P450,000. IF THE INTEREST RATE IS 15% PER YEAR, WHICH IS THE BETTER OPTION?

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a. Buy now

b. Buy in 4 years

c. Do not buy

d. Buy different

Correct Answer: A (Buy the machine now)

Step 1: Calculate the Future Value (F) of the current cost

If the farmer invests the P250,000 today at 15% interest, how much will it be worth after 4 years?
P = P250,000 | i = 0.15 | n = 4
F = P(1 + i)^n
F = 250,000(1 + 0.15)^4 = 250,000(1.749)
F = P437,250

Step 2: Compare the values

Future Cost of machine = P450,000
Future Value of money = P437,250

Step 3: Conclusion

Since the machine's cost (P450,000) is higher than the grown value of the money (P437,250), it is cheaper to buy the machine now.

Result: a. the farmer should buy the machine now