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    ME 291 Engineering Economy

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    salmanshahidkhan
    This document summarizes key concepts about the impact of inflation from Chapter 14 of the textbook Engineering Economy. It defines inflation and deflation, provides formulas for converting between dollars in different time periods adjusting for inflation, and distinguishes between real and inflation-adjusted interest rates. It also gives examples of present worth calculations both with and without adjusting for inflation.

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    ME 291 Engineering Economy

    Uploaded by

    salmanshahidkhan
    48 views9 pages
    This document summarizes key concepts about the impact of inflation from Chapter 14 of the textbook Engineering Economy. It defines inflation and deflation, provides formulas for converting between dollars in different time periods adjusting for inflation, and distinguishes between real and inflation-adjusted interest rates. It also gives examples of present worth calculations both with and without adjusting for inflation.

    Original Title

    Lecture 25

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    This document summarizes key concepts about the impact of inflation from Chapter 14 of the textbook Engineering Economy. It defines inflation and deflation, provides formulas for converting between dollars in different time periods adjusting for inflation, and distinguishes between real and inflation-adjusted interest rates. It also gives examples of present worth calculations both with and without adjusting for inflation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    48 views9 pages

    ME 291 Engineering Economy

    Uploaded by

    salmanshahidkhan
    This document summarizes key concepts about the impact of inflation from Chapter 14 of the textbook Engineering Economy. It defines inflation and deflation, provides formulas for converting between dollars in different time periods adjusting for inflation, and distinguishes between real and inflation-adjusted interest rates. It also gives examples of present worth calculations both with and without adjusting for inflation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 9

    ME 291

    Engineering Economy
    Lecture 25
    Effect of Inflation – Chapter 14

    Faculty of Mechanical Engineering


    Ghulam Ishaq Khan Institute, Topi, Swabi

    ENGINEERING
    ECONOMY
    Impact of Inflation

    • Inflation is an increase in the amount of


    money necessary to obtain the same
    amount of product or service before the
    inflated price was present.
    • Deflation is the opposite of inflation.

    ENGINEERING
    ECONOMY
    Formulae
    • Money in one period of time t1 can be brought to the same
    value as money in another period of time t2 by using the
    equation.

    • Dollars in period t1 are called constant-value dollars or


    today’s dollars. Dollars in period t2 are called future dollars.
    If f represents the inflation rate per period (year) and n is
    the number of time periods (years) between t1 and t2, then

    ENGINEERING
    ECONOMY
    Types of Interest Rates

    • Real or inflation-free interest rate I


    when there is no inflation involved
    • Inflation-adjusted interest rate if
    interest rate in which inflation has been taken into account.
    Also called inflated interest rate.

    ENGINEERING
    ECONOMY
    PW calculations adjusted for inflation

    • When the dollar amounts in different periods are


    expressed in constant value dollars, the equivalent
    present and future amounts are determined using the
    real interest rate i.
    • For example $5000 with an inflation rate of 4% will
    become 5000(1.04)4 = 5849 after 4 years. But if the
    constant value of these dollars is found out at that time
    by 5849/(1.04)4 = 5000 then the present worth can be
    found by applying simple interest rate.
    • If the value is not converted to constant value dollars
    then the present worth calculation has got a modified
    formulae.

    ENGINEERING
    ECONOMY
    PW calculation (Contd….)
    • We know that

    • With inflation rate f involved the formulae can be modified to

    or

    Where if = i + f + if

    ENGINEERING
    ECONOMY
    Example 14.1

    ENGINEERING
    ECONOMY
    Example 14.2
    • A 15-year $50,000 bond has a dividend rate of 10% per
    year, payable semiannually, is currently for sale. If the
    expected rate of return of the purchaser is 8% per year,
    compounded semiannually, and if the inflation rate is
    expected to be 2.5% each of 6-month period, what is the
    bond worth now (a) without an adjustment for inflation
    and (b) when inflation is considered?

    ENGINEERING
    ECONOMY
    Example 14.3
    • A self-employed chemical engineer is on
    contract with Dow Chemical, currently working
    in a relatively high-inflation country. He wishes
    to calculate a project’s PW with estimated cost
    of $35,000 now and $7000 per year for 5 years
    beginning 1 year from now with increase of
    12% per year thereafter for the next 8 years.
    Use a real interest rate of 15% per year to
    make the calculations (a) without an
    adjustment for inflation and (b) considering
    inflation at a rate of 11% per year.

    ENGINEERING
    ECONOMY

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