Practice_Problems_3_Inflation

Practice_Problems_3_Inflation - FIN340 PRACTICE PROBLEMS 3...

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1 FIN340 PRACTICE PROBLEMS 3 INFLATION Background: Movie Titanic is the top movie in the history of the United States (without adjustment for inflation). In 1997 , it generated $600.80 million in revenue. Star Wars is the second all time top movie in the history of the United States (adjusted for inflation). In 1977 , it generated $461.00 million in revenue. QUESTION 1. What are these two cash flows: are they nominal cash flows or real cash flows? Can we compare them? SOLUTION: The two cash flows are nominal cash flows. Since they occur in different years (one in 1997 and the other in 1977), we cannot compare them directly. We have to convert them into real cash flows based on a particular base year. QUESTION 2. Suppose that the CPI for 1977 is 61, for 1997 is 161, for 1987 is 114. (2.1) What is the revenue of Titanic worth in 1977 (in terms of 1977 dollars)? (2.2) What is the revenue of Star Wars worth in 1997 (in terms of 1997 dollars)? (2.3) What is the revenue of Titanic worth in 1987 (in terms of 1987 dollars)?
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Practice_Problems_3_Inflation - FIN340 PRACTICE PROBLEMS 3...

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