Inflation and the Time Value of Money

Inflation and the Time Value of Money-- Amy Stone and Abbie Tucker

Inflation

  • Inflation is the rise in general price levels over time, usually measured as the percentage change of the Consumer Price Index (CPI)
  • Causes of Inflation:
    • Demand-pull Inflation: a type of inflation caused by an increase in demand or in the supply of money.
    • Cost-push Inflation: a type of inflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available.
    • Buit-in Inflation: a type of inflation that results from past events and persists in the present.Time Value of Money
  • Inflation Calculator - http://www.westegg.com/inflation/
    • Discounting to present value
      • Present Value calculator: http://www.moneychimp.com/calculator/present_value_calculator.htm
      • Formula to find the purchasing power in present dollar value:
        721727a84aa678799f9dbfe6186842ac.png
      • Where:
        • PV is the value at time=0, the Present Value.
        • FV is the value at time=n, the Future Value.
        • i is the rate at which the amount will be discounted each period, the discount rate.
        • n is the number of time periods.

external image cb4ee236bb8906b060e3861ec4ae15d7.png
      • Where:
        • PV is the value at time=0, the Present Value.
        • FV is the value at time=n, the Future Value.
        • i is the rate at which the amount will be compounded each period, the compound growth rate.
        • n is the number of time periods.
  • Examples of Inflation-
      • Gas prices raising and salary staying the same

yearly_inflation_rate.gif
  • The Effect of Inflation-
    • Prices of all individual items will increase.





The Time Value of Money

  • the concept of the time value of money is that a set amount of money is worth more than the same amount in the future, due to it's earning potential.
  • "Time is money."
  • A dollar today is worth a dollar tomorrow.
  • A dollar you earn today, could be invested, so that you would have more than a dollar tomarrow.
  1. Future Value Basics
    • the future value of your investment at the end of the first year.
  2. Present Value Basics
    • what your investment gives you now if you were to spend today.



time_value_of_money.jpg

Sources:
http://www.investopedia.com/university/inflation/inflation1.asp#axzz1jLKRX6Kk
http://www.netplaces.com/economics/inflation/types-of-inflation.htm