Exam 9: Inflation

Suppose John deposits some money in an investment account that offers 5% interest rate per year. Annual inflation is expected to be 3.5% over the next 5 years. What is the inflation rate per half a year?

A project involves a substantial expenditure right now, and is expected to yield a return of $X ten years in the future. We expect the annual inflation rate to be positive over the next ten years. Four analysts calculate the present worth of the project. Alice bases her calculation on the assumption that X is given in real dollars, using a real MARR. Bob also assumes that X is in real dollars, but uses the actual MARR to calculate present worth. Cecil assumes that X is in actual dollars, and calculates present worth using the real MARR. Donna also assumes that X is in actual dollars, and calculates present worth using the actual MARR. Who comes up with the highest figure for present worth?

A 10-year project is evaluated under two scenarios: (i)with inflation, and (ii)without inflation. Without inflation, and with a 10% interest rate, its present worth is $24 254. If annual inflation of 2% is assumed, then the project's present worth becomes 20% lower. It is also known that the project's first cost involves the purchase of a capital asset which depreciates at 13% and will be sold for salvage at the end of the project, there are no operating costs, and there is a fixed annual revenue. What is the project's first cost?

Jagdeep is considering a project that requires a large immediate investment and yields a return in five years. If he assumes that there will be be no inflation over the next five years, his calculated rate of return on the project is 25%. If he instead assumes a 10% annual rate of inflation, what will his expected real rate of return be?

The real MARR can be defined as

The highest level of inflation in Canada in the post World War II period was observed in the

Heather deposits $8 000 in an investment account that offers 5% interest per year. The interest is due in 5 years. Annual inflation is expected to be 4% over the next 5 years. Heather's actual MARR per six-month period is 5%, compounded semiannually. What is the present worth of the interest?

A bank offers me 10% annual interest on an investment, but the inflation rate is 5%. If I invest $500 in the bank, what will the value of my investment be, in real dollars, in five years time?

A valuable asset was priced at $1 million in 1995. What should be its nominal price in 2012 if the CPI was 95 in 1995 and 145 in 2012?

An engineering project requires $20 000 as first cost and has a planning horizon of five years. Operating costs are $2 000 per year, and expected annual revenue is $8 000. Calculate the project's present worth if the real interest rate is 5%, the expected annual inflation is 2% and the salvage value is $5 000.

Explain how Statistics Canada calculates the inflation rate.

You want to invest $ 1 000 in a mutual fund that offers a 5% guaranteed rate of return. Current interest rate is 2%, and inflation is expected to be 1% per year. How much will you accumulate in your account in 5 years in terms of today's dollars?

How does inflation affect the evaluation of engineering projects?

If the CPI was 99.6% in January 2001 and 128% in January 2005, what was the approximate annual inflation over the intervening period?

The equation that converts actual dollars into real dollars can be written in terms of

The price of oil is rising at 10% per year while inflation is just 2.5% per year. If the current price of oil is $45 per barrel, what would be the price of oil ten years from now in real dollars?

A municipality decided to invest $500 000 in a four-year project. To decide whether the project should be undertaken, a city engineer was asked to run a financial analysis. Carrying out the analysis in actual dollars, the engineer found that by its very end the project would just break even. If inflation is expected to be 4.0% per year, what is the real IRR?

Jason inherited $6 000 from his grandfather. He decided to invest the money in a two-year project that promised a return of $2 000 by the end of this year and $4 500 at the end of the next year. Jason read an analytical report that inflation is going to be 3.0% over the next 5 years. He decided that he would only invest in this project if it could give him at least 10% real rate of return. What is the present worth of his investment under this rate of return?

It is known that the inflation rate over next three years is expected to be 5% in the first year, 10% in the second and 15% in the third. In such a case, average expected annual inflation rate is

Annual inflation is expected to be 3.5% over the next 5 years. Heather's real MARR is 6%, compounded semiannually. What is the effective actual MARR per half a year?