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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## This document was uploaded on 03/03/2014 for the course ISE 460 at USC.

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