Name : Shams Mashar Assignment - 05

Id : fa18-beee-0040

Question No : 01 The CPI of a country from 2016 to 2020 is as follows,

2016- 122.5, 2017—129.32, 2018—137.56,2019—143.52, 2020-149.32
Calculate average inflation rate from 2016 to 2020?

Answer: As we know that ,

f = ( F / P )1/n - 1
Data:

Where,
F = Final CPI = 149.32
P = Present CPI = 122.5
n = number of periods = 4 years
f= Average rate of inflation = ?

Solution:

Putting the values of ‘F’ , ‘P’ and ‘n’ into the above formula we get
the value of f,

¼
f = ( 149.32 / 122.5 ) - 1
¼
f = ( 1.21893) - 1
f = 1.0507 - 1
f = 0.0507 * 100 = 5.07% Answer

Q-2 A company is estimating following cash flows for next five years
Year Cash Flows
2020 Rs 75,000.00
2021 Rs 95,000.00
2022 Rs 1,10,000.00
2023 Rs 1,15,000.00
2024 Rs 1,22,000.00
If Company is expecting an average inflation of 5.5% in next 5 years what
will be the values of
cash flows in constant rupees?

Answer :

Data : average inflation rate = 5.5 %

Constant rupees during each period=?

Solution :
Years Cash Flow In Actual Rupees Conversion Cash Flow in
at Constant Rupees
f

2020 Rs 75,000.00 (1+0.055)0 Rs 75,000.00

2021 Rs 95,000.00 (1+0.055)-1 Rs 90,047.39
2022 Rs 1,10,000.00 (1+0.055)-2 Rs 98,829.76
2023 Rs 1,15,000.00 (1+0.055)-3 Rs 97,935.57
2024 Rs 1,22,000.00 (1+0.055)-4 Rs 98,480.44

Q-3 If my father was drawing a salary of Rs2500.00 in 1985 what will be its
actual value in 2020
if the average rate of inflation during this period has been 6.2% ?

Answer:
As we know that,
Ra = Rc ( 1+f )n
Data: Where,

f = rate of inflation = 6.2% = 0.062

Rc = Constant rupees = Rs 2500.00
n = number of periods = 35 years
Ra = Actual rupees = ?

Solution :

Putting the values of ‘Rc’ , ‘f’ and ‘n’ into the above formula we get the
value of Ra,

Ra = 2500 ( 1+ 0.062)35
Ra = 2500 ( 1.062)35
Ra = 2500 ( 8.210282225)
Ra = Rs 20525.705 Answer.

Q-4 If nominal interest in a country is 7.5% while rate of inflation is 4.3%

what will be the real
interest rate?

Answer: As we know that,

1+r = 1+i /( 1 + fe)

Data : Where,

r = real interest rate = ?

i = nominal interest rate = 7.5%=0.075
fe = expected rate of inflation = 4.3%=0.043
Solution:

Putting the values of ‘i’ and ‘fe’ into the above formula we get the value of
r,

1+r = 1+ 0.075 / 1+ 0.043

1 + r = 1.075 / 1.043
1+r = 1.0306
r = 1.0306 - 1
r = 0.0306 * 100 = 3.06% Answer.