ENGG 209 Lecture Notes - Lecture 19: Cash Flow, Mansfield

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Inflation
Definitions
Average Inflation Rate (
): 


Annual Inflation Rate (
): 
 
EXAMPLE: Find  and average inflation rate between 1986 and 1993 given the following
information:
Year
CPI Canada
1986
100.0
1992
128.1
1993
130.4


 



A general inflation rate, or specific inflation rates (if available) can be used for many
cost/revenue items
Current (actual / as spent / nominal) dollars: Estimates of actual cash flows in each period
Constant (real) dollars: Actual dollars adjusted for inflation
Let:
o An = current cash flow
o An’ = constant cash flow

EXAMPLE: Suppose you get a new job in 2017 and your initial salary is $60,000/pear. If you will
get annual raises of 3% in each of the next 2 years and the general inflation rate is 5%, find your current
and constant dollar earnings in 2018 and 2019.
n
Year
Current Dollars
Constant Dollars
0
2017
60,000
60,000
1
2018
61,800
61,880/1.05=58,857
2
2019
63,654
63,645/1.052=57,736
Equivalence Calculations Under Inflation
Market (nominal) interest rate (i)
o Takes into account earning value of money and anticipated inflation
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