profile-image A government data-processing center has been plagued in recent years by complaints from employees of back pain. Consultants have estimated that upgrading office furniture at a net cost of $430,000 would reduce the incidence and severity of back injuries, allowing the center to avoid medical care that currently cost $68,000 each year. They estimate that the new furniture would also provide yearly benefits of avoided losses in work time and employee comfort worth $18,000. The furniture would have a useful life of 5 years, after which it would have a real scrap value equal to 10 percent of its initial net cost. The consultants made their estimates of avoided costs assuming that they would be treated as occurring 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.

[2 points] What is the NPV of the costs incurred and benefits received across all five years of the furniture replacement project? b.[1 point] Should the employer go ahead with the project or not?

c.[2 point] Suppose that the employer believes that the cost of medical care will rise faster than the cost of other goods. Specifically, it believes that that the inflation rate for medical care will be 6 percent and the inflation rate for other goods will be 3 percent. Should the employer go ahead with the project or not under this inflation scenario?