Escalating operating cost in NPV analysis?
When comparing the purchase of 2 machines next to equal lives, should you escalate the operating cost since calculating NPV or merely use today's operating cost?
I'm audible range different things. Some right to be heard that you enjoy to escalate the cost to tale for inflation. Others, however, voice that the discount factor, i.e. the cost of property, already considers inflation and thus, near is no requirement for escalating the operating cost.
Any proposal?
Thanks incredibly much.
Answers:
It depends on how you are computing the cost. If you enjoy computed the equipment cost across the vivacity of equipment, afterwards you should hold added the operating costs for respectively year. The discount factor will after nick safekeeping of it.
If you are computing the operating cost seperate from the cost of aquisition, after you own to run a seperate computation for that. Remember that while the importance of the equipment decrease across time, the cost of maintence will not and in reality usually increases.
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I'm audible range different things. Some right to be heard that you enjoy to escalate the cost to tale for inflation. Others, however, voice that the discount factor, i.e. the cost of property, already considers inflation and thus, near is no requirement for escalating the operating cost.
Any proposal?
Thanks incredibly much.
Answers:
It depends on how you are computing the cost. If you enjoy computed the equipment cost across the vivacity of equipment, afterwards you should hold added the operating costs for respectively year. The discount factor will after nick safekeeping of it.
If you are computing the operating cost seperate from the cost of aquisition, after you own to run a seperate computation for that. Remember that while the importance of the equipment decrease across time, the cost of maintence will not and in reality usually increases.