Factors that increase costs and prices—especially for materials and manufacturing costs sensitive to market, technology, and labor availability—can be considered separately using the real interest rate i, the inflation rate f, and additional increases that grow at a geometric rate g. The future amount is calculated based on a current estimate by using the relation
F = P (1 + i) n (1 + f) n (1 + g) n
= P [(1 + i) (1 + f) (1 + g)] n
The product of the first two terms enclosed in parentheses results in the inflated interest rate if. The geometric rate is the same one used in the geometric series. It commonly applies to maintenance and repair cost increases as machinery ages. This is over and above the inflation rate. If the current cost to manufacture an electronic subcomponent is $300,000 per year, what is the equivalent cost in 3 years, provided the average annual rates for i, f, and g are 10%, 3%, and 2%, respectively?