Engineering Economic Analysis

460 INFLATION AND PRICECHANGE

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Inflation Effect on After-TaxCf!'.c~l(lti9.ns

• Earlier we noted the impact of inflation on before-tax calculations.We found that if the sub-
  sequent benefits brought constant quantities of dollars, then inflation will diminish the true
  value of the future benefitsand, hence, the real rate of return. If, however,the future benefits
  keep up with the rate of inflation, the rate of return will not be adversely affected by the
  inflation. Unfortunately, we are not so lucky when we consider a situation with income
  taxes,as illustratedby Example14-9..

A $12,000 investment will refum'anI1ualbenefits for 6 years with np salvage value at the end of

th~period. Assume straight-line depreciation and a46% incometaX t;ate.Th~probleJ1}islo solve

for both before- and after-tax rates of return, the latter fortwo sitUations:

1. No inflation:the annual b~nefitsare copstant at$:4918 Rer year.


2. Inflation equal to5%:. the benefits from theinve$tin~nt;increa&eatthiss~e rate, so that
   they continue to be the ~uivaIent of$2~:I8in-y-ear,.O-})ase&'dbllars.

The benefit schedule for the two,situations is as follows:~ '

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Annual Benefit for

BotJt Situations

(Year-O.based dollars),

No Inflation,

Actuaf Dollars

Received

5% Inflation

Factor*

5 %loflatioJ1,
Actual DoUars
Year Received
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tI \1

1 2 3 4 5 6

$291~

2918

2918

2918

2918

?918

$2918

29{8.

2918

2.918

2918

291.8

(t05)1

(1.05)2

(1.05)3

(1.05)4

(1.05)5

(1.05),6

$3064

3217

3378

3547

3724

39~0

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" *May be read from the 5% compound interest tabfe as(F/P,5%,n).

,

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ILiF ~,.

PW of cost J:>Wof benefit

, '. ' '.' " 12,000.,

12,OQO - 2918(P /...4,i, 6}1'! ~'"(f[Adr62 = -<:'''"".,, ~'4~\J

• 
  
  
  
  • -.;.' -- - ;iiO Blfti1M!lb.':.:...A; ,.I!I:._~.' ,",~"""~'C~..,,,,,,-<-,-:.~AtW-, 21';.~ .: 2918,:",-.~;. . _~~_ '",
  
  
  
  

.

,

.

~.... -

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Fr¥.m compound interest tables:

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