Class_Nov12_2013_Lec22_ISE460(1)(1)

Finding actual dollars conversion from constant to

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Unformatted text preview: : f Ⱥ 213.2 Ⱥ f = Ⱥ Ⱥ 172.2 Ⱥ Ⱥ = 2.40% 1/9 −1 Example 11.2 Yearly and Average Infla%on Rates   Year cost data: Year Cost 0 $504,000 1 538,000 2 577,000 3 629,500   Find: Yearly and Average infla%on rates   Solu%on: Infla%on Terminology – II   Actual Dollars (An ): Es%mates of future cash flows for year n that take into account any an%cipated future changes in amount caused by infla%onary or defla%onary effects.   Constant Dollars (An’ ): Es%mates of future cash flows for year n in constant purchasing power, independent of the passage of %me (or base period). Finding Actual Dollars   Conversion from Constant to Actual Dollars   General infla%on rate = 5% Period Net Cash Flow in Constant $ Conversion Factor Cash Flow in Actual $ 0 -$250,000 (1+0.05)0 -$250,000 1 100,000 (1+0.05)1 105,000 2 110,000 (1+0.05)2 121,275 3 120,000 (1+0.05)3 138,915 4 130,000 (1+0.05)4 158,016 5 120,000 (1+0.05)5 153,154 Finding Constant Dollars   Conversion from Actual to Constant dollars   Example 11.4  ­ General infla%on rate of 5% End of Cash Flow in Conversion period Actual $ at f = 5% Cash Flow in Constant $ Loss in Purchasing Power 0  ­$20,000 (1+0.05)0  ­$20,000 0% 1 20,000 (1+0.05) ­1  ­19,048 4.76 2 20,000 (1+0.05) ­2  ­18,141 9.30 3 20,000 (1+0.05) ­...
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