An engineer analyzing cost data about hydrogen sulfide monitors discovered that the information for the first three years was missing. However, he knew the cost in year 4 was $1250 and that it increased by 5% each year thereafter. If the same trend applied to the first three years, the cost in year 1 was:

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An engineer analyzing cost data about hydrogen sulfide monitors discovered that the information for the first three years was missing. However, he knew the cost in year 4 was $1250 and that it increased by 5% each year thereafter. If the same trend applied to the first three years, the cost in year 1 was:

a. $1312.50

b. $1190.48

c. $1028.38

d. $1079.80

Option D,$ 1,079.80 is correct

Explanation:

The present value formula can be used to determine the cost in year one as follows:

PV=FV * (1+r) ^-n

FV is the future cost in year 4 which is $1,250

r is the growth rate of cost per year which is 5%

n is the duration of time involved, it is 3 because the difference between year 4 and year 1 is 3

PV=$1250 * (1+5%) ^-3

PV=$1250 * (1.05) ^-3

PV=$1250*0.863837599

PV=$ 1,079.80

The cost of the hydrogen sulfide monitor in year one is $ 1,079.80

In essence option D,$ 1,079.80 is correct