Problems Economics/Finance

## Inflation Review

1. The rate of inflation is 5% now, and is expected to remain so for the next five years. What will be the price, 4 years from now, of an item that currently sells for \$100?

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2. Measured in today's prices an investment of \$1000 gives returns of \$200 per year for 5 years and an additional lump sum return of \$500 at the end of five years. There is a general inflation rate of 7% and all cash flows are fully responsive to inflation. Write the formulas for the returns that will be received in each of the five years.

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3. Considering the situation described in problem 2, is the investment it acceptable? The MARR without considering inflation (real-MARR) is 10%.

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4. What if the returns associated with the investment of problem 2 do not change with inflation. The numbers given are in actual dollars. The general inflation rate is 7%. What cash flows do we analyze, and what interest rate do we use?

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5. Write the cash flows you would analyze in problem 2 for an after tax analysis. The straight line of depreciation results in an annual depreciation of \$100. The tax rate is 50% for ordinary income and capital gains.

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6. When inflation is present, which would you rather use, the straight line method or the SYD method?

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 Problems Economics/Finance