An investor wants a real rate of return of 8% per year. If the expected annual inflation rate for the next several years is 3%, what market interest rate should be used in project analysis calculations?
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- What should be done if the future price of a specific cost element (j) is not expected to follow the general inflation rate?A recently graduated mechanical engineer wants to build a reserve fund as a safety net to pay his expenses in the unlikely event that an unexpected emergency arises. His aim is to have $45,000 developed over the next 3 years, with the proviso that the amount must have the same purchasing power as $45,000 today. If the expected market rate on investments is 8% per year and inflation is averaging 2% per year, find the annual amount necessary to meet his goal.The inflation rate in a Central American country is 6% per year. What real rate of return will an investor make on a $100,000 investment in a copper mine stock that yields an overall internal rate of return of 28% per year?
- Continental Airlines operates in and out of many countries. Country A has a low inflationrate of 3% per year while country B has a high rate of 30% per year. A $1 million fund ismaintained in each country for emergency purchases to repair disabled aircraft. (a) Use aformula to determine the purchasing power after 2, 4, and 5 years if the funds are notutilized. (b) (Spreadsheet exercise) Use a spreadsheet to plot the diminishing purchasingpower curves, if assigned by your instructor. (c) With the dramatic effect of 30%inflation, if you were president of Continental Airlines, how would you manage thissituation?If the inflation rate is higher than the interest rate, then A. it is no longer possible to earn any amount from an initial capital. B. only if the inflation is within the same period where interest is less, the investor will not earn. C. the amount invested at present time will be equal to the future amount. D. any annual worth computed at any period n (of N total years) will not be equal to the annual worth at n+1 period. E. None of theseTwo alternatives, A and B are under consideration. Both have a life of five years. Alternative A needs an initial investment of $17,000 and provides annual net revenue of $4,000 per year for five years. Alternative B requires an investment of $19,000 and has annual net revenue of $5,000. All estimates are in actual dollars. Inflation is expected to be 2% per year for the next five years, and the inflation-free (real) MARR is 9.8% per year. a) What is the PW(A$) of alternative A? b) What is the PW(A$) of alternative B? c) What is the market interest rate adjusted for inflation?
- Due to the integrated nature of their capital markets, investors in both the U.S. and U.K. require the same real interest rate, 3.2%, on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 2.1% in the U.S. and 3.6% in the U.K. for the next three years. The GBP/USD rate is currently 1.3081. What is your expected future spot for GBP/USD three years from now? (X.XXXX)A new 21-kW power substation was built in 2016 in Gibson County for $1.4 million. Weakley County, which is nearby, is planning to build a similar though smaller (18-kW) substation in 2019. The inflation rate has averaged 1.5% per year. If the power sizing exponent is .85 for this type of facility what is the estimated cost of construction of the Weakley County substation?Calculate the market interest rate for a project with a life time of 3 years, where general inflation over the three years of project is estimated as 5%, 7% and 3% Assume the zero-inflation interest rate is 4%
- Due to inflation in Australia in December 2019, the price for petrol increased from AUD 1.35 to AUD 1.45. This caused petrol consumption to decrease from 2500 litres to 2450 litres at a 7-Eleven Petrol Station in Sydney. Also, when the price for Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle) increased from AUD 950.00 to AUD 990.00; demand for these air conditioners fell from 2500 units to 2000 units. Following this condition, answer the questions below.i. Using the mid-point formula calculate the price elasticity of demand for petroland Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle). ii. Is the price elasticity of demand: elastic, unit elastic or inelastic for eachcommodity (petrol and Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle)? iii. Suppose the government decides to increase tax for petrol and Hyundai 7.5kWInverter Split System Air Conditioner (Reverse Cycle). Use two diagrams to explain the incidence of the tax…The annual fuel costs to operate a small solid-waste treatment plant are projected to be $1.8 million, without consideration for any future inflation. The best estimates indicate that the annual inflation-free interest rate (i') will be 7% and the general inflation rate f= 4%. If the plant has a remaining useful life of five years, what is the present equivalent value of its fuel costs, using actual-dollar analysis?A self-employed chemical engineer is on contract with Dow Chemical, currently working in a relatively high-inflation country. She wishes to calculate a project’s Present Worth with estimated costs of Php1,35,000 now and Php120,000 per year for 5 years beginning 1 year from now with increases 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.