Question

Consider a situation, where (a) the equal-payment cash flow of $1,500 in constant dollars over ten years is converted from the (b) equal-payment cash flow in actual dollars over 10 years at an annual general inflation rate = 4% and i = 10%. What is the amount A in actual dollars equivalent to A' = $1,500 in constant dollars?

Answer 1

Given data:

Constant dollars (With inflation adjustment) = A’ = $1500

Inflation rate = m = 4%

Interest rate = r = 10%

Actual dollars (Without inflation adjustment) A =?

Considering the inflation and interest rate the Inflation adjusted interest rate will be:

Inflation adjusted interest rate (I) = Interest rate - Inflation rate

I = 10% - 4% = 6%

Let us use present worth comparison to find the value of A

1500(P/A,6%,10) = A(P/A,10%,10)

Using DCIF Tables

1500(P/A,6%,10) = A(P/A,10%,10)

1500(7.360) = A(6.145)

A = 1500*(7.360)/6.145

A = $1796.58