Because testing of nuclear bombs was halted internationally in 1992, the Department of Energy has developed a laser system that allows engineers to simulate (in a laboratory) conditions in a thermo-nuclear reaction. Due to soaring cost overruns, a congressional committee undertook an investigation and discovered that the estimated development cost of the project increased at an average rate of 2% per six-months over a 5-year period. If the original cost was estimated to be $3.1 billion 5 years ago, what is the expected cost today?

The estimated development cost of the project will increase from the original cost of $3.1 billion 5 years ago to $3.7727 billion today.

Explanation:

Data and Calculations:

Original estimated development cost = $3.1 billion

Average rate  of interest = 2% per six months or 4% per year (2 * 2%)

Period of project = 5 years using 4% or 10 using 2%

Using a future value factor of 1.217 from a future value table at 4% per year for 5 years:

The expected cost today = $3.1 billion * 1.217 = $3.7727 billion

Using an online financial calculator:

Results:

FV = $3,778,882,701.98

Total Interest$678,882,701.98

N (# of periods)  10

I/Y (Interest per year)  4

PV (Present Value)  $3,100,000,000

PMT (Periodic Payment)  0

Settings

P/Y (# of periods per year)  2

C/Y (# of times interest compound per year)  2

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