## 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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