AACE International Exam CCP Topic 1 Question 29 Discussion

Steel:

Year 1 inflation: 2.5%

Year 2 inflation: 2.5%

Year 3 inflation: 3.0%

Total cumulative inflation for Steel over 2.5 years: CumulativeInflation=(1+0.025)(1+0.025)(1+0.03)=1.0251.0251.03=1.0806251.031.11304text{Cumulative Inflation} = (1 + 0.025) times (1 + 0.025) times (1 + 0.03) = 1.025 times 1.025 times 1.03 = 1.080625 times 1.03 approx 1.11304CumulativeInflation=(1+0.025)(1+0.025)(1+0.03)=1.0251.0251.03=1.0806251.031.11304

Steel cost component: 0.3 times $350,000 = $105,000

Adjusted cost: $105,000 times 1.11304 $116,869.20

Copper:

Year 1 inflation: 1.0%

Year 2 inflation: 1.5%

Year 3 inflation: 2.0%

Total cumulative inflation for Copper over 2.5 years: CumulativeInflation=(1+0.01)(1+0.015)(1+0.02)=1.011.0151.021.045151.021.0651text{Cumulative Inflation} = (1 + 0.01) times (1 + 0.015) times (1 + 0.02) = 1.01 times 1.015 times 1.02 1.04515 times 1.02 1.0651CumulativeInflation=(1+0.01)(1+0.015)(1+0.02)=1.011.0151.021.045151.021.0651

Copper cost component: 0.3 times $350,000 = $105,000

Adjusted cost: $105,000 times 1.0651 $111,835.50

Manufacturing Labor:

Year 1 inflation: 2.5%

Year 2 inflation: 3.0%

Year 3 inflation: 3.5%

Total cumulative inflation for Manufacturing Labor over 2.5 years: CumulativeInflation=(1+0.025)(1+0.03)(1+0.035)=1.0251.031.0351.056251.0351.09138text{Cumulative Inflation} = (1 + 0.025) times (1 + 0.03) times (1 + 0.035) = 1.025 times 1.03 times 1.035 1.05625 times 1.035 1.09138CumulativeInflation=(1+0.025)(1+0.03)(1+0.035)=1.0251.031.0351.056251.0351.09138

Labor cost component: 0.4 times $350,000 = $140,000

Adjusted cost: $140,000 times 1.09138 $152,793.20

Final Price:

FinalPrice=116,869.20+111,835.50+152,793.20381,497.90text{Final Price} = 116,869.20 + 111,835.50 + 152,793.20 381,497.90FinalPrice=116,869.20+111,835.50+152,793.20381,497.90

The closest option: Answer: D. $378,750