Inflation Inflation is a term that describes the continuous upward movement in the general level of prices. This has the effect of steadily reducing the purchasing power of your money, that is, what you can actually buy with your money. Example:Suppose that a one-litre carton of milk costs $1.70 today. a What will be the price of the one-litre carton of milk in 20 years’ time if the average annual inflation rate is 2.1%? Using the compound interest formula: A = R( 1 + r/n ) nt 100 A = 1.70( ) A = 1.7 × = $2.57 Using the finance solver:

Example:If savings of $ are hidden in a mattress in 2009, what is the purchasing power of this amount in 8 years’ time if the average inflation rate over this period is 3.7%? You are required to find the present value of an item that will cost $ in 8 years? Using the financial solver:

Depreciation Depreciation is the amount by which an item loses its value Flat rate depreciation Flat rate depreciation is when the value of the item is reduced by the same percentage of the purchase price (or amount) for each year it is in use.

Example:A computer system costs $9500 to buy, and decreases in value by 10% of the purchase price each year. a What is the amount of the depreciation after 4 years? b Find its book value after 4 years. a. D = 9500×10×4 = $ b. V = = $ The last book value is called scrap value, which is the price of an item before is writen off. V t Reducing balance depreciation Is the equivalent, but opposite, situation to compound interest, where the interest is calculated according to the new balance.

Example: A computer system costs $9500 to buy, and decreases in value by 20% each year. a What is the book value of the computer after 4 years? b By how much has the value of the computer depreciated over the 4 years. a.Using the depreciation formula: V = 9500 (1 - 20/100) 4 = $ Using the finance solver: b. D = = $

Unit cost depreciation Some items of equipment depreciate not by their age but by the amount of use they have had. This method is called unit cost depreciation.

Example: A machine originally costing $ is expected to produce CDs The output of the machine in each of the first three years was , and units respectively. If the anticipated scrap value of the machine is $ , find: a its book value at the end of each of the three years. b the number of years the machine might be expected to last if the average production per year for the remainder of its life is CDs a. Unit cost = = $ Book value year 1 = × = $ Book value year 2 = × = $ Book value year 3 = × = $ b. D in a year = × = $5850 Total depreciation = = $ number of years = /5850 = 8.1 years Total number of years = 8 +3 = 11