chapter9A - Additional Solutions Chapter Nine Inflation...

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Additional Solutions: Chapter Nine: Inflation 9S.1 It is worth an actual dollar. *9S.2 It is bad news for the retired CEO, unless her pension is inflation-linked. If the insurance company is a life insurance company, inflation is good news, since life insurance companies usually promise a fixed sum on death, and that sum can now be paid out in inflated dollars. But the question leaves open the possibility that the company insures against fire or theft; in which case, if the amount to be paid out is set at replacement cost, the news is nether good nor bad. (Since the replacement cost in real dollars will be constant.) For the mortgage company, it is bad news: they have lent a sum of money in the past, and they're now going to get paid back in deflated dollars. (If the mortgages are variable-rate, they may be able to put the rates up to cushion the effect.) 9S.3 We have three options to consider: living in Canada and saving money in a Canadian bank; living in Placidia and saving money in a Placidian bank; and living in Placidia and saving money in a Canadian bank. (Nothing in the question forbids keeping our money under the mattress rather than in the bank, but this is obviously not a good idea.). The simplest approach is to use a spreadsheet, 9S3.xls: Year Can. Income ($) Pla. Income (P) Pla. Income ($) COL ($) COL (P) Banked ($) Banked (P) FW ($) FW (P) 1 45 000 55 000 47 826 10 000 11 500 35 000 43 500 42 543 52 875 2 47 250 61 600 46 578 10 000 13 225 37 250 48 375 43 122 56 000 3 49 613 68 992 45 363 10 000 15 209 39 613 53 783 43 673 59 296 4 52 093 77 271 44 180 10 000 17 490 42 093 59 781 44 198 62 770 5 54 698 86 544 43 027 10 000 20 114 44 698 66 430 44 698 66 430 Total (P) 297 371 Total ($) 218 233 147 846 From the spreadsheet results, we see that the Canadian job will give us $218 233 in the bank at the end of five years. The Placidian job will give us an impressive P 297 371, but this converts back to a rather less impressive $147 846. So, all other things being equal, we should take the Canadian job. Moving the Placidian pay cheques back to Canada does help, but not enough to change our decision. As we see from the table below, the future worth of this strategy is $199 226.
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Year Pla. Income (P) Pla. Income ($) COL (P) Banked (P) Banked (P to $) FW(P to $) 1 55 000 47 826 11 500 43 500 37 826 45 978 2 61 600 46 578 13 225 48 375 36 578 42 344 3 68 992 45 363 15 209 53 783 35 363 38 988 4 77 271 44 180 17 490 59 781 34 180 35 889 5 86 544 43 027 20 114 66 430 33 027 33 027 Total (P) Total ($) 196 226 *9S.4 To find the after-tax cost of the asset, we adjust the initial cost using the tax benefit factor, or ` TBF (see page 283 of the text). The
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This note was uploaded on 04/16/2009 for the course ENSC 201 taught by Professor Dr.johnjones during the Fall '08 term at Simon Fraser.

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chapter9A - Additional Solutions Chapter Nine Inflation...

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