1 / 7

ENGG 401 X2 Fundamentals of Engineering Management Spring 2008 Extra Material: Inflation

ENGG 401 X2 Fundamentals of Engineering Management Spring 2008 Extra Material: Inflation Dave Ludwick Dept. of Mechanical Engineering University of Alberta http://members.shaw.ca/dave_ludwick/. Revisiting Inflation.

kaden-bradshaw
Download Presentation

ENGG 401 X2 Fundamentals of Engineering Management Spring 2008 Extra Material: Inflation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ENGG 401 X2 Fundamentals of Engineering Management Spring 2008 Extra Material: Inflation Dave Ludwick Dept. of Mechanical Engineering University of Alberta http://members.shaw.ca/dave_ludwick/

  2. Revisiting Inflation • Inflation is the concept where as time moves forward, the purchasing power of money decreases. • A dollar tomorrow will buy less than it does today. • In Canada, inflation is often measured by the Consumer Price Index (CPI) • The real interest rate realized by a lender is often given as the difference between the interest rate paid by the borrower (nominal or market interest rate) and inflation (f): • …but this is only an approximation.

  3. Real Interest • A more accurate calculation of real interest rate is:

  4. Inflation Example #1 • You put $1000 into an account with an interest rate of 12%. How much money will you have 5 years from now and what will its purchasing power be if inflation is 5% per year? • Actual money: • Purchasing power:

  5. Actual versus Real Dollars • Actual dollars are the money we ordinarily think of. They are the amount of money in an account, in your wallet, etc. • The first part of the last example is asking about actual dollars. • Real dollars, on the other hand, are a more abstract concept. They are defined relative to an equivalent sum at an earlier point in time. • The second part of the last example is asking about real dollars. • Actual dollars (also called inflated dollars) have their value reduced due to inflation, while real dollars (inflation-free dollars) do not.

  6. Inflation In-Class Problem #1 • Your city spent $2.5 million to build a public facility 50 years ago, and put aside an equal sum at the same time for its eventual replacement. The money was invested in an account earning 8% interest, and inflation has been 6% per year. • Questions: • What are the actual and real dollars of the investment? • What value facility will the city be able to purchase? • What value facility will the city be able to purchase relative to dollars from 50 years ago? • Will the city be able to purchase an equivalent facility today and still put aside enough money to replace it in the future?

  7. Inflation In-Class Problem #2 • On the birth of your first child, you decide to put aside money for her first year’s tuition to the UofA. Tuition is currently $5400 per year, and the provincial government just passed legislation mandating that tuition increases are tied to inflation (projected to be 3.5%). • What lump sum do you need to invest today in a GIC paying out 5% interest to cover her first year of tuition 18 years from now? • What if you found a way to put a monthly sum into her account which paid 2%. What monthly payment would you need to make?

More Related