INFLATION

1. The inflation rate is expected to be 8% per year into the foreseeable future. How many years will
it take for the peso’s purchasing power to be one-half of what it is now?
Ans:
F = 1/2 of the value
f = 8% or 0.08

F = P (1 + ƒ)n
2P = P (1 + 0.08)n
P P

n= 9.006 years

2. At present, you invest P10,000 in a 15% security for 5 years. During the time, the average annual
inflation is 6%. How much in terms of present pesos, will be the account of maturity?
Ans:
P = 10,000
i = 15% or 0.15
n = 5 years
F=?

F = P(1 + i)n
F = 10,000 (1 + 0.15)5
F = 20113.57

F= P1(1 + i)n
20,113.57 = P1(1 + 0.06)5
P1= 15.030
3. A buy and sell agent buy a motorcycle for P37,000 in the years 1990 and it was sold for P90,000
in the year 2000. If the increase in price is due to inflation, find the average rate of inflation
within the period.
Ans:
P = 37,000 year 1990
F = 90,000 year 2000
n = 10 years
ƒ= ?

F = P (1+ ƒ)n
9,0000 = 37,000 (1 + ƒ)10
ƒ = 0.092 or 9.2 %

4. A man decided to deposit a certain amount of money on his son’s 10 th birthday, which will be
equivalent to P280,000 with today’s purchasing power of the peso on his son’s 25 th birthday when
he will start his marriage life. If the bank pays 5.5% compounded annually and the rate of
inflation is 8.7% compounded annually, how much should be deposited by the man?
Ans:

F = 280 000
f = 5.5% or 0.055
ƒ = 8.7% or 0.087 (inflation)
n = 15 years
P=?

F = P (1 + ƒ)n
P = F (1 + ƒ)-n
P = 280,000 (1 + 0.055)-15
P = 62,509

5. A machine cost 25,000 ten years ago. If the rate of inflation for the first 4 years is 6% and 9% on
the years thereafter, find the cost of the machine now assuming that the cost in price was due to
inflation only.
Ans:
P = 25,000
 ƒ= 6% or 0.06 in first 4 years
ƒ= 9% or 0.09 in succeeding years

F = P(1 + ƒ)n
F= 25,000 (1+ 0.06)4
F= 31,561

F = P(1 + ƒ)n
F= 31,561 (1+0.09)6
F=52,930

Prepared by: Submitted to:

Deo Factuar Engr. Allyzza Nichole Maranan
BSIE Section 5 Professor for Engineering Economy