Deck 14: Inflation and Price Change

Question 1

A production equipment at Dalton Manufacturing is priced at $40,000 in current $ - . The inflation rates for the next three years are expected to be 3%, 2%, and 4% respectively. What will be the cost of the equipment in R$ three years from now?

A) $39,156
B) $41,129
C) $36,609
D) $42,024

Answer 1

$36,609

Question 2

The cost of a first-class postage in 1970 was $0.06 and in year 2016 was $0.47. Determine the average annual rate of increase in the price of postage stamps during the years 1970 to 2016.

A) 3.97%
B) 4.58%
C) 6.63%
D) 4.84%

Answer 2

4.58%

Question 3

The tuition in a private university was $25,000 per academic year in 1999. If the inflation rate has been averaging at the rate of 3%, how much one should have invested in 1999 to send a kid to this private university in 2017. Assume the investment earned an 8% return.

A) 10,649
B) 12,156
C) 14,027
D) 13,252

Answer 3

10,649

Question 4

Sam bought a rental property for 500,000 five years ago. He sold the property this year for $2,200,000 and spent $250,000 fixing it up before selling the property. If the inflation rate for the past 5 years has been steady at 4% annually, compute the after-tax real rate of return (i ?) on this investment. Assume a capital gain tax of 15%.

A) 33.17%
B) 28.13%
C) 22.11%
D) 31.84%

Question 5

An equipment was purchased two years ago financing for 5 years at 8% interest compounded monthly. The inflation rate for the past two years has been 3% per year and is expected to remain the same for the next 3 years. Compute the real interest rate for this loan.

A) 5.45%
B) 8.73%
C) 6.86%
D) 5.15%

Question 6

The university your daughter wants to go in the fall of 2107 requested that you pay the tuition for all 4 years upfront when she starts school. The current tuition bill is $50,000. You expect the inflation rate to average 2% per year, and that the university pays a 4 % interest per year for the four year period.
What is the present worth of your payment?

Question 7

If future cash flows are to be expressed in actual $ (A$), the interest rate that should be used in determining the present worth is the market interest rate.

Question 8

When the purchasing power of a currency ($) decreases over time, the result is inflation.

Question 9

If the actual market interest rate is 15% and real interest rate is 9.2% then the inflation rate is 5.8%.