Module04 - Principles of Engineering Economy Inflation and...

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Principles of Engineering Economy Inflation and Purchasing Power Part I
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Key Concepts Last Module: Time Value of Money and Interest This Module: Inflation and Purchasing Power Value of money decreases due to inflation Results in a loss of purchasing power
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Time Value of Money Money has value because it gives us utility. Generally, money is preferred now, as opposed to later (same amount) One can spend it now and get utility One can invest it and watch it grow with interest for greater future utility One can put it under the mattress and watch it lose purchasing power
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Inflation Inflation and deflation affect cash flows and must be accounted for in analysis. Measure inflation with Price Index ratio of price of some commodity or service at some point in time to the price at some earlier point in time Price indices exist for numerous products, commodities, etc. CPI is most commonly known and used. (www.bls.gov)
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Measuring Inflation One Period
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Measuring Inflation One Period f = CPI t + 1 - CPI t CPI t
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Measuring Inflation One Period 1992: 140.3 1993: 144.5 f = CPI t + 1 - CPI t CPI t
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Measuring Inflation One Period 1992: 140.3 1993: 144.5 f = CPI t + 1 - CPI t CPI t f = 144.5 - 140.3 140.3 = .02993 = 2.99%
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Measuring Inflation Multiple Periods
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Measuring Inflation Multiple Periods Must include the effects of compounding.
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Multiple Periods Must include the effects of compounding. CPI
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Module04 - Principles of Engineering Economy Inflation and...

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