In Example 14-6 several parameters changed at different rates over the period of the
economic study.By using the respectiveindividualinflationrates, theactual dollaramounts
for each parameter were obtained in each year. Then, we used a market interest rate to
discount these actual dollar amounts. Problems of this type can be handled by inflatingthe
various parameters at their respective estimated inflation rates, combining these cash flows
if appropriate, and then treating them as actual dollars that occur in those years.
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(^458) INFLATION AND PRICECHANGE
DIFFERENT INFLATION RATES PER PERIOD
In this section we address the situation of inflation rates for the various cash flows in an
analysis that are changing over the life of the study period. Rather than different inflation
rates for different cash flows, in Example 14-7 theinterest ratefor the same cash flow is
changing over time. A method for handling this situation is much like that of the preceding
section. We can simply apply the inflation rates in the years in which they are projected to
occur. We would do this for each of the individual cash flows over the entirety of the study
period. Once we have all these actual dollar amounts, we can use the market interest rate
and decision criteria to apply any of the measures of merit developed earlier.
While working as a clerk atPiggly Wiggly,Elvis has learned much about the cost of different
vegetables. The kitchen manager atHeartbr.eakHotel called..receIit1y,reqllestingElvis to estimate
the raw material costover the next5 years to introduce succotash(lima beans and com) to the buffet
line. To develophis estimate, Elvis has used his advanced knowledge of soil growing conditions,.,
wor14 demand, and govel1)IIlentsubsidy prograI11sfor these two crops. He has estimated the~ ....
follqwing data:
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·Costs for lima beans willinfiate at3%per year for the next 3 years and tl1~Iiat4% for the
following.2 years.
'., Co~tsfor com will inflate at8%per yearfor the next 2 years and then will decrease 2% in
:: the (ollowing :3years.
The ''kitchen manager.Wants to know the~ql!iva.lent~nual cost ofpr()vidiI1gsuccofush on the
buffet line over.the 5-yearperiod.Hisbefor:e-tilX .,1'v1A.R.Ris20%.Tb,efrn.lllager.estiIIJatesthat be
wilfpeed an average of 50 pounds each()f be~s and (O()fIleach qay. Jiliebotel kitchen operates
6 days perwee1c, 52 week~per year. GliITentcosts are~!1' -, '.~" ''''',-' $0.35111:>fPtIim& bean$ and$0.80Ilb for~. ';~~' .....
conn.. ...-...-
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~~ ;rodf~'s;cosHor;;Qll~,,¥~at:§,.§1.i:QR.W ~Q~g~.w.fil~~s~:'"~ ~ ~ =--;;;p;;;;0:;~ = =;: = =
U Lima beans 0.3$$ti1?x..~pJ1Jlij~y")y6;day/Wkx$fl. ~¥Jyr $S4()Q/yr
= ~J~ ~~ ~ .,= :y~l}l~ f:., =., ;;=~Q,$lib~_xi6.qaJ/~,$2wP~~ Ii': j~~89~ _II
