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Unformatted text preview: Principles of Engineering Economy Real and Current Cash Flows and Exchange Rates Part I Key Concepts Last Module: Inflation and Purchasing Power This Module: Converting cash flows : Real and current dollar cash flows Effects of exchanging currencies Converting Cash Flows Current Dollars : Money that comes out of, or into, your pocket Real Dollars : Uninflated money  a fictitious term used for comparisons To convert between the two  use the inflation rate Divide out inflation for Current to Real Multiply in inflation for Real to Current Example: Real to Current Cazaly Resources and Echelon Resources signed an agreement to deliver 5 million wet tons per annum of primary crushed iron ore from the Shovelanna Project to BHP Cazaly, Echelon sign MOU with BHP on Shovelanna, Ralph Wragg Australian Business News, November 29,2005 Example: Real to Current The contract was signed in 2005 and wash expected to start in 2008 and last for 10 years. What are the real and current dollar cash flow diagrams given the benchmark prices? Cazaly, Echelon sign MOU with BHP on Shovelanna, Ralph Wragg Australian Business News, November 29,2005 Example: Real to Current Mt Newman Fines benchmark ($/ton) Assume 2005 is time zero. Delivery starts in 2008 and lasts through 2018. Souce: Iron Ore Industry Trends and Analysis, Baffinland Iron Mines Corporation, September 30,2005. 98 99 00 01 02 03 04 05 29.9 26.63 27.79 28.98 28.28 30.83 36.67 62.89 Example: Real to Current Ignoring inflation, the time zero price stays constant. The Real dollar cash flow diagram is then: Example: Real to Current Ignoring inflation, the time zero price stays constant. The Real dollar cash flow diagram is then: 314.5 M 314.5M 3 4 5 13 Example: Real to Current Assume annual inflation rate stays constant over time (although it hasnt recently!) Inflation rate: Example: Real to Current Assume annual inflation rate stays constant over time (although it hasnt recently!) Inflation rate: Bench t + n = Bench t (1 + f ) n Example: Real to Current Assume annual inflation rate stays...
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 Fall '08
 tufecki

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