1.When the inflation rate is 4% per year, how many inflated dollars will be requ

Question

1.When the inflation rate is 4% per year, how many inflated dollars will be required 20 years from now to buy the same things that $10,000 buys now?

2.Find the present worth of a program using a piece of equipment that has a first cost of $150,000 an annual operating cost of $60,000, and a salvage value of 20% of the first cost after 5 years. Assume that the real interest rate is 10% per year, that the inflation rate is 7% per year, and that the inflation is to be accounted for. Also, assume that all costs are future dollar estimates.

3. An industrial engineer planning for her son’s college education made deposits into a separate brokerage account every time she earned extra money from side consulting jobs at NPMG. The amounts and timing of the deposits are as follows: EOY1 $5,000; EOY2 $8,000; EOY3 $9,000; EOY4 $9,000; EOY7 $15,000; EOY11 $16,000; EOY17 $20,000. If the account increased at a market rate of 15% per year and inflation averaged 3% per year over the deposit period, determine the value of the college education account at the end of year 17 in today’s dollars.

4.A pulp and paper company is planning to set aside $150,000 now for possibly replacing its large synchronous refiner motors. If the replacement isn’t needed for 5 years, how much will the company have in the account provided it earns a market rate of 10% per year and the inflation rate is 4% per year?

5.Which of the statements below is true with respect to the rate of inflation?

It erodes the purchasing power of consumers

It is a decrease in the value of currency

It increases the money supply

All the above

Explanation / Answer

(1)

Required future value ($) = 10,000 x (1.04)20 = 10,000 x 2.1911 = 21,911

(2)

Since inflation has to be accounted for, relevant discount rate is the Real interest rate.

Salvage value = $150,000 x 20$ = $30,000

Present Worth ($) = - 150,000 + 60,000 x PVIFA(10%, 5) + 30,000 x PVIF(10%, 5)

= - 150,000 + 60,000 x 3.7908** + 30,000 x 1.6105** = - 150,000 + 227,448 + 48,315

= 126,763

**From PVIFA and PVIF Factor tables

NOTE: As per Chegg answering guidelines, first 2 questions are answered.

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