Chapter15Inflation-OxfordUniversityPress.pdfVIP

Chapter 15 Inflation 15-1 The first sewage treatment plant for Athens, Georgia cost about $2 million in 1964. The utilized capacity of the plant was 5 million gallons/day (mgd). Using the commonly accepted value of 135 gallons/person/day of sewage flow, find the cost per person for the plant. Adjust the cost to 1984 dollars with inflation at 6%. What is the annual capital expense per person if the useful life is 30 years and the value of money is 10%? Solution Population equivalents = 5 mgd/135 = 37,037 Cost per capita = = $54 1984$, F = 54(F/P, 6%, 20) = $173.18 Annual Cost, A = 173.18(A/P, 10%, 30) = $18.37 15-2 How much life insurance should a person buy if he wants to leave enough money to his family, so they receive $25,000 per year in interest, of consent Year 0 value dollars? The interest rate expected from banks is 11%, while the inflation rate is expected to be 4% per year. Solution The actual (effective) rate that the family will be getting is i = = = 0.0673 = 6.73% To calculate P, n = ∞ (capitalized cost) P = = = $371,471 Therefore, he needs to buy about $371,500 of life insurance. 15-3 211 212 Chapter 15 Inflation A European investor lives near to one of his country’s borders. In Country A (where he lives), an 8% interest rate is offered in banks, and the inflation rate is 3%. Country B, on the other hand, has an inflation rate of 23%, and banks are offering 26% interest on deposits. a) What is the real or effective interest rate that this person gets when investing in his Country? b) This investor believes that the currency of Country B will not change in its value relative to the value of the