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Sir, why don’t we use nominal rate of 15.5% directly as the discount rate in here?
A company is considering investment in new labour-saving equipment costing $1m. The current wage rate is $5 per hour but this is expected to increase by 5% each year into the foreseeable future. The equipment is expected to save 20,000 labour hours per year.
The company’s nominal cost of capital is 15.5%.
What is the present value of the savings in wage costs over a 10-year planning period (to the nearest $000)?
A.$385,000
B.$558,000
C.$615,000
D.$676,000
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