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Unformatted text preview: Page 1 of 4 ISyE 3025 Spring 2011, Practice HW 4 This homework is intended for Learning Cycle #4 1. Obtain the price someone paid when purchasing a new item ten years ago, and determine the price for a similar, new item today. Determine the change in the price, and determine the annual rate of inflation (or deflation) for the item. Compare this rate with a index for similar products (find an index on the www.bls.gov web site). 2. Maintenance expenses for production department XYZ were $235,000 in 1999. You are benchmarking various departments, and using 2007 dollars for the comparisons. However, data for XYZ for 2007 are not available, so you will use the 1999 data and adjust the value for inflation. The price index values for your industry are as follows: 1983 1999 2000 2001 2002 2003 2004 2005 2006 2007 100 187.6 193.2 202.9 211.0 218.4 228.2 232.8 239.2 244.8 Determine the value of the maintenance expenses in 1996 but expressed in 2004 dollars. 3. In 1975 John Doe earned $45,500 after taxes (income tax, payroll tax, etc.) Expenses for necessities were: Category of necessity Expenses in 1975 rent and utilities 8,000 groceries 7,500 clothing 2,000 transportation 3,900 medical 3,400 In 2002 his daughter Mary Doe earned $98,000 after taxes. The consumer price index (CPI, a general measure of inflation) increased by an average of 3.2% per year from 1975 to 2002. a. How much discretionary income (for things other than necessities, such as entertainment, vacation, investment, etc.) did John Doe have in 1975? b. Assume that the quality and quantity of the necessities consumed by both John and Mary were the same. Assume the CPI rate in this example applies to all types of consumer expenditures. Estimate the expenditures by Mary Doe in 2002 for each category of necessity. Category of necessity Expenses in 2002 rent and utilities groceries clothing transportation medical c. Which one was better off, John or Mary, in terms of having more discretionary income? d. Now assume that the actual expenses for necessities by Mary were as shown below. Compute the actual inflation rates, on an annual basis, for each category of necessity. [We are still assuming no change in quality or quantity in each category.] Category of necessity Expenses in 2002 Annual inflation rate rent and utilities 24,000 groceries 19,000 clothing 8,000 transportation 13,000 medical 13,000 4. A company projects revenues and expenses as shown in the table (values are in thousands), but the projection is in constant dollars based on time 0. There are no depreciation expenses. The forecasts for inflation rates are as follows: general inflation rate of 3% which applies to revenue, rate of 2% for labor, and rate of 4% for materials. The general rate of 3% also applies to the MARR. The MARR is 12% for zero inflation. The MARR is 12% for zero inflation....
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