### Educational Content: Understanding Inflation and Investment Strategies#### Graph: Forty Years of Changing Inflation RatesThis graph illustrates the changing inflation rates over a forty-year period from 1977 to 2017. The vertical axis represents the percent inflation, ranging from -1.0% to 11.0%, while the horizontal axis marks each year within the given period.- **Highlights of the Graph:** - **1979-1981:** Inflation peaked in 1980 at 10.5%. - **1985-1989:** Inflation rates ranged between 3.6% and 5.5%. - **1990s:** Generally low inflation, with the lowest at 1.6% in 1998. - **2000-2009:** Moderately stable rates around 2.0% to 3.0%, with a notable deflation of -0.34% in 2009. - **2010-2017:** Gradual increase from 0.12% in 2015 to 2.1% in 2017.#### Context and QuestionsYou are the vice president of finance for a scuba diving gear manufacturer planning a major plant expansion in 5 years. A sinking fund is to be created to accumulate the required funds for this project, estimated at $3,000,000 in today's dollars, factoring in an average 6% inflation over the next 5 years.Your company's investments yield an 8% compound interest, compounded quarterly.##### Questions:1. **Use the compound interest concept to determine the future value required for the project, considering inflation. (Refer to Table 11-1)** - Enter your answer to the nearest cent.2. **Calculate the sinking fund payments required at the end of each 3-month period to accumulate the necessary funds. (Refer to Table 12-1)** - Enter your answer to the nearest cent.This exercise is designed to help you understand how inflation impacts investment decisions and the strategies employed to mitigate financial risks over time.

Note: Table 11-1 and 12-1 is not provided, hence the question is solved using formula. a) Compound interest is the rate which the investment earns as as interest rate, however, in this case, compound interest formula will be used to calculate the value of the investment at the end of 5 years using the inflation rate. Using formula: Value of the sinking fund at the end of 5 years when inflation rate is 6% per year for the next 5 years would be: FV=Amount×1+inflation raten=$3000000×1+6%5=$4,014,676.7328 Answer: An amount of $4,014,676.73 is required for the project after taking inflation in to account. b) An amount "FV" of $4014676.7328 is required at the end of "n" 20 periods (5*4) at a rate of 2% per quarter (8%/4). Using future value annuity formula, payment every quarter can be determined as below: PMT=FV×r1+rn-1=$4014676.7328×2%1+2%20-1=$80293.5346560.485947395978354=$165,230.918656011 Answer: An amount of $165,230.92 sinking fund payments needs to be made every 3 months to accumulate the desired amount.

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You are the vice president of finance for a manufacturer of scuba diving gear. The company is planning a major plant expansion in 5 years. You have decided to start a sinking fund to accumulate the funds necessary for the project. Your company's investments yield 8% compounded quarterly. It is estimated that $3,000,000 in today's dollars will be required; however, the inflation rate on construction costs and plant equipment is expected to average 6% per year for the next 5 years. MY NOTES ASK YOUR TEACHE Forty Years of Changing Inflation Rates 11.0 10.5 9.0 7.0 7.0 -6.5 5.5 5.0 5.0 4.0 3.6 3.6 3.0 3.0 3.0 3.4 Iilili 2,8 2.4 3.1 2.5- 2.6 2.0 2.1 1.0- 1.5 0.12 -1.0 -0.34 *93 "95 "97 "99 01 "03 05 "07 "09 11 "77 79 81 '83 "85 "87 "89 91 *13 15 17 Year (a) Use the compound interest concept from Chapter 11 to determine how much (in $) will be required for the project, taking inflation into account. (Use Table 11-1. Round your answer to the nearest cent.) (b) What sinking fund payments (in $) will be required at the end of every 3-month period to accumulate the necessary funds? (Use Table 12-1. Round your answer to the nearest cent.) 24

You are the vice president of finance for a manufacturer of scuba diving gear. The company is planning a major plant expansion in 5 years. You have decided to start a sinking fund to accumulate the funds necessary for the project. Your company's investments yield 8% compounded quarterly. It is estimated that $3,000,000 in today's dollars will be required; however, the inflation rate on construction costs and plant equipment is expected to average 6% per year for the next 5 years. MY NOTES ASK YOUR TEACHE Forty Years of Changing Inflation Rates 11.0 10.5 9.0 7.0 7.0 -6.5 5.5 5.0 5.0 4.0 3.6 3.6 3.0 3.0 3.0 3.4 Iilili 2,8 2.4 3.1 2.5- 2.6 2.0 2.1 1.0- 1.5 0.12 -1.0 -0.34 93 "95 "97 "99 01 "03 05 "07 "09 11 "77 79 81 '83 "85 "87 "89 91 13 15 17 Year (a) Use the compound interest concept from Chapter 11 to determine how much (in $) will be required for the project, taking inflation into account. (Use Table 11-1. Round your answer to the nearest cent.) (b) What sinking fund payments (in $) will be required at the end of every 3-month period to accumulate the necessary funds? (Use Table 12-1. Round your answer to the nearest cent.) 24

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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RadCo is considering two projects. The first, project A. has $400,000 income after the first year which increases by 8% each year for a total of 5 years. Project B has $450,000 income after the first year which increases by $25,000 each year for a total of 5 years. RadCo can only choose one project. Based on present worth today, which project should RadCo choose? The interest rate is 6% annual compounded annually.
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.8 million. Over the past five years, the price of land in the area has increased 11 percent per year, with an annual standard deviation of 15 percent. A buyer has recently approached you about buying the land in the next 11 months for $2,030,000. The risk-free rate of interest is 5 percent per year, compounded continuously. You want the option to sell the land to the buyer in one year. What is the price of the transaction today?
You are considering a 10 year investment plan in which your target is $150,000. There are two options available for you: Option 1: Putting exactly an equal amount of money into an investment fund at the end of each year for 10 years with the rate of return of 8%, annually compounding. Option 2: Putting your initial investment of $50,000 in an asset that will pay you 9% rate of return, compounding quarterly for the first 6 years. The rate of return, compounding annually for the last 4 years (the period from year 7 to the end of year 10) has not been defined yet. Required: Compute the effective annual interest rate (EAR) in the first 6 years in Option 2? Compute the annually compounding rate of return you should target for your asset in the following 4 years to get $150, 000 at the end of year ten in Option 2?
Kerr Kompany is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $20,450 at the end of each year for three years. The company requires a 11% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 3 2.531 2.489 2.444 2.402 4 3.239 3.170 3.102 3.037 The profitability index for this project is: A. 1.00. B. 0.80. C. 1.24. D. 1.27.
Two years ago, Lou Marshall, Inc. deposited $18,125 in an investment account for the purpose of buying new equipment four years from today. Last year, it added another $20,212 to this account. The company plans on making a final deposit of $17,503 to the account today. How much will be available when it is ready to buy the equipment, assuming the company earns 13.27% APR on its invested funds? Choose the closest amount. $118,681.22 $92,502.23 $91,918.47 $104,777.28 $72,097.87
You are considering a large CNC equipment purchase. You will need an initial deposit of $165,000. The annual revenues expected to come from the use of the CNC equipment are $85,000 starting in year 1 increasing by $4000 each year (i.e. $85,000 in year 1, $89,000 in year 2, etc.). Annual operating and maintenance costs are expected to be $35,000 every year starting in year 1. The equipment is expected to last for 15 years. What is the ROR? Question 6 Part C: Provide the ROR for the purchase. Enter your answer in the form 12.34 (for example, 12.34% would be entered as 12.34)
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You are the vice president of finance for a manufacturer of scuba diving gear. The company is planning a major plant expansion in 5 years. You have decided to start a sinking fund to accumulate the funds necessary for the project. Your company's investments yield 12% compounded quarterly. It is estimated that $4,000,000 in today's dollars will be required; however, the inflation rate on construction costs and plant equipment is expected to average 6% per year for the next 5 years. (a) Use the compound interest concept from Chapter 11 to determine how much (in $) will be required for the project, taking inflation into account. $ (b) What sinking fund payments (in $) will be required at the end of every 3-month period to accumulate the necessary funds? $

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