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

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13 Dec 2016

School

Department

Course

Professor

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