EC-Week-15-inflation and replacement.ppt

SJTUEngineeringEconomics-The6thLectureInflationsandPriceChangesReplacementProblemsDr.HuHaoShanghaiJiaoTongUniversitySJTUAgendaReviewofLastLecture(15)S1:DealingwithInflationsandPriceChanges(45)1stBreak(2:00-2:10pm)S2:DealingwithReplacementProblems(50)2ndBreak(3:10-3:20pm)S3:TutorialsandanOverviewofPreviousCourse(3:20-4:30pm)SJTUPrinciplesofmoney-timerelationshipApplicationsofmoney-timerelationshipComparingAlternativesPerformprojectevaluationonabeforetaxbasisDepreciationandDepletionEvaluationofAlternativesonanAfter-taxBasis+DevelopingCashFlowsEconomicAnalysisNationalEconomicalEvaluation+SocialEvaluation+ProjectEvaluationConceptsofProjectEvaluationAlternativeSelection(Decision)UncertaintyInflationsandPriceChangesReplacementProblemsSJTUSession1DealingwithInflationsandPriceChangesSJTUGeneralPriceInflationGeneralpriceinflationisdefinedasanincreaseinthepricespaidforgoodsandservicesbringingaboutareductioninthepurchasingpowerofthemonetaryunitInflationismuchmorecommonthandeflationDeflationisthedecreaseinpriceswithanincreaseinthepurchasingpowerofthemonetaryunitSJTUMeasureofPriceChangeConsumerPriceIndex(CPI)CPIisacompositepriceindexthatmeasurespricechangesinhousing,transportation,clothing,foodandotherselectedgoodsandservicesusedbyindividualsandfamiliesCPIannualinflationrate=(CPI)k-(CPI)k-1/(CPI)k-1*100SJTUTerminologyandBasicConcepts(1)Actualdollars(A$):thenumberofdollarsassociatedwithacashfloworanon-cashflowamountasofthetimeitoccurs.Realdollars(R$):dollarsexpressedintermsofthesamepurchasingpowerrelativetoaparticulartime.SJTUTerminologyandBasicConcepts(2)Generalpriceinflationrate(f):ameasureofthechangeinthepurchasingpowerofadollarduringaspecifiedperiodoftime.Combined(nominated)interestrate(ic):themoneypaidfortheuseofcapital,expressedasaneffectiverate(%)perinterestperiod,thatincludesamarketadjustmentfortheanticipatedgeneralpriceinflationrateoftheeconomy.marketinterestrateSJTUTerminologyandBasicConcepts(3)Realinterestrate(ir):themoneypaidfortheuseofcapital,expressedasaneffectiverate(%)perinterestperiod,thatdoesnotincludesamarketadjustmentfortheanticipatedgeneralpriceinflationrateoft