470 INFLATION AND PRICECHANGE---
!(b)What is theaverage percentage increaseof labor
cost .over the 3-year period?.
(c) What is the present worth of the insulation cost
of this project?
(d) Calculate the future worth of the labor and insu-
lation material cost portion of the project.
(e) Calculate the present worth of the total construc-
tion project for Beanie Bob.
14-43 Philippe Marie wants to race in the Tour de France tena. years from now. He wants to know what the cost ofa custom-built racing bicycle will be ten years from
today. Calculate the cost given the following data.the boat, and agreed to the terms of the following loan:
all principal and interest is due in three years (balloon
loan), first year annual interest (on the purchase price)
is set at 5%, this is to be adjusted up 1.5% per year for
each of the following years of the loan. How much
does Andrew owe to payoff the loan in three years?
14-47 You were recently looking at the historical pri~es paid
for homes in a neighborhood that you are interested
in. The data that you found, average price paid, is
given below. Calculate on a year-to-year basis how
home prices in this neighborhood have inflated(a-e
in the table below).14-44 Due to cost structures, trade policies and corporate
changes the costs for three big automakers are esti-
mated to vary over the next three-year period. These
changes will be reflected in the purchase prices of
their vehicles. Mary Clare will graduate in three years
and will be buying a new vehicle-she is considering
one model from each company. Which car should
Mary Clare purchase three years from now, assuming
everything but purchase price is equivalent?
Price Will Inflate
x% per Year
4 %
1.5
8Automaker
X
Y
ZCurrent Price
$27,500
30,000
25,00014-45 Granny Viola has been saving money in the Bread &
Butter mutual fund for 15 years. She has been a
steady contributor to this fund over those years and
has a pattern of putting $100 into the account every
3 months. If her original investment 15 years ago was
$500 and interest in the account has varied as shown,
what is the current value of her savings?
Years Interest Earned in the Account
1-5 12% compounded quarterly
6-10 16 compounded quarterly
10-15 8 compounded quarterly14-46 Andrew just purchased a new boat for $15,000 to use
on the river near his home. He has received delivery of
(f) What is your estimate of the inflation rate for
this year?
14-48 The U.S. tax laws provide for the depreciation of
equipment based on original cost. Yet owing to sub-
stantial inflation, the replacement cost of equipment
is often much greater than the original cost. What
effect, if any, does this have on a firm's ability to buy
new equipment to replace old equipment?
14-49 Sam Johnson inherited $85,000 from his father. Sam
is considering investing the money in a house, which
he will then rent to tenants. The $85,000 cost of the
propertY,consists of $17 ,500 for the land, and $67,500
for the house. Sam believes he can rent the house and
have $8000 a year net income left after paying the
property taxes and other expenses. The house will
be depreciated by straight-line depreciation using a
45-year depreciable life.
(a)If the property is sold at the end of 5 years for
its book value at that time, what after-tax rate
of return will Sam receive? Assume that his in-
cremental personal income tax rate is 34% for
federal and state taxes.
(b) Now assume there is 7% per year inflation, com-
pounded annually. Sam will increase the rent 7%
per year to match the inflation rate, so that after
considering increased taxes and other expenses,
the annual net income will go up 7% per year.--Cost Will Inflate Average Inflation Rate
Item Current Cost x% per Year Year Home Price for That Year
Frame $800 2 %
Wheels 350 10 5 years ago $165,000 (a)
Gearing system^2005 4 years ago 167,000 (b)
3 years ago 172,000. (c)
Braking system^1503 2 years ago 180,000 (d)"
Saddle 70 2.5
Finishes 125 8 last year 183,000 (e)
this year 190,000 (f, see below)