(^464) INFLATION AND PRICE CHANGE
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:!;; FIct.URE=:14-7, e'After-taxJRR8::.with MAGRS:anddn:flation~;:;' - ..
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;:,._. _The IRRs arethigher in this eXaJ1.lple(1~29%without' inflation yi';6.7% with straight':lfne.', : __ " '.. ,,' ", ,-'"' '", :_ ,_,.::.', ,_. ".,_. - "'. .. ',', :,{i-~:'"":,,. ,.-~'ji:; --_,:co' ,..,' _ _ ". ...:._','.'_. .,, , .,:.'. ,". ... _ _ ,',. _"..,'....,,', __ "':'". ... _'",' ,,'.i..... ,
deyreciationin Example 14-9,and5.<58%with irt'flationvs 4.9%) b~causeMACR,Ssupportsfaster
depreciation, so the depreciation deductioQsare II1orevalllable..Also because the depreciation is
fa~!er,the results are affected ~6mewhatless by inf\a.qQn~Specifically;witb,'MACRS5% inflation
lowers the IRR by 1.6% and Withstrai~ht-:lilledepredation, 5% infliltionlowersthe 1M by 1.8%.Summary
Inflation is characterizedby rising prices for goods and services, while deflationproducesa
fall in prices. An inflationarytrend makes future dollars have less purchasing power than
present dollars. Inflation benefits a long-term borrower of money because paymerit of debt
in the future is made with dollars that have reduced purchasing power. This advantage to
borrowers is at the expense of lenders.
Deflation has the opposite effect from inflation. If money is borrowed over a period of
time in which deflation is occurring, then debt will be repaid with dollars that have more-- -- -----A B C D E F G H
1 0% ==InflationRate 46% =Tax Rate-^2 Actual $$ MACRS Actual $8 Actual $$ Actual$$ Real$$
3 Year Received Deprec. % peprec. Tax ATCF ATCF
4 0 -12000 -12000 -'-12000
5 1 2918 20.00% (^240023826802680) =:;:.F5/(1+$B$l)AA5
6 2 2918 32.00% 840 -424 3342 3342
7 3 2918 19.20% 2304 282 2636 2636
8 4 2918 11.52% ta82 706 2212 ' 2212
9 5 2918 11.52% 1382 706 2212 2212
(^1062918) 5.76% ....6Ql. ,)024 ,)894 '1894
I (^11) Formulas /
==..;-"$B$4",CI0. /'
./ #BlO-E10
(^12) for Yrq ;:=$B$5(1-j-$B$1)AA10 (BlO-IJtO)$E$t 7.29% ;:;;;IRR
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= Inflationi4te
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14 5% 46% ;:;;;Tax Rate
(^15) ActuaUs
,- Actual$$ MACRS .Actlla.l$s Actllal $8 Real $s
16 Year Received Depree. % Pelmc... Tax,. A1'CF ATCF
I 17 0 -12000 -.-12000 '"'-12000.
.... 18^13064 2().OR%^2400 ......305. ".^27592627
(^19) .... 3217 32.00% 3840 ..,287 > 3504 3178
(^2033378) 19.20% (^23044942884). 2,491
(^2143547) 11.52% ' 1382 996. 2551 ." .2099.
(^225) I (^3724) 11.52% (^1382) J()n (^2647) '.' .2074
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! 23 6 3910 5.76% .691^1481 243()^1813
! 24 .'. ..., 5.68% '..I:@.. w