Answer to Question #4867 in Finance for Mitchell Stokes

Question

A business is plagued by complaints from employees of back pain. Consultants have estimated upgrading office furniture at a net cost of $450,000 would reduce the incidence the incidence back injuries, allowing the center to avoid medical care that currently costs $68,000 each year. The new furniture is estimated to provide yearly benefits of $18,000. The furniture has useful life of five years,and salvage value equal to 10 percent of its initial cost. The consultants made their estimates of avoided costs assuming they occur 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 to run between 3 and 6 percent, but is uncertain as to the exact rate. In other words, it is uncertain as to whether the costs of medical care will inflate at the same rate as other prices or rise 3 percent faster.Should the center purchase the new furniture?