Allowing for inflation

Inflation depreciates money in a manner similar to, but different from, the idea of discounting to allow for the time value of money. The effect of inflation on the net cash flow in future years can be allowed for in a similar manner to the net present worth calculation given by equation 6.9, using an inflation rate in place of, or added to, the discount rate r. However, the difficulty is to decide what the inflation rate is likely to be in future years. Also, inflation may well affect the sales price, operating costs and raw material prices differently. One approach is to argue that a decision between alternative projects made without formally considering the effect of inflation on future earnings will still be correct, as inflation is likely to affect the predictions made for both projects in a similar way. 

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Step 5 Estimate maintenance costs (after making allowance for tax relieQ over life of structure including access costs such as scaffolding. In general the future maintenance costs must be estimated making allowance for inflation and then discounted to present values see maintenance terms in equation below). 

Maintenance costs are steadily rising and we must adjust maintenance costs at present-day values (M) to allow for inflation at an annual rate of r, (Note r, is expressed like r). 

To estimate the future cost of a plant, some prediction has to be made of the future annual rate of inflation. This can be based on the extrapolation of one of the published indices, tempered by the engineer s own assessment of what the future may hold. Inflation is difficult to forecast, and allowance for inflation is often included in the contingency charges added to the project cost. 

For some compounds the only variation in price over time is minor adjustments to allow for inflation. This is the case for some specialty compounds that have relatively high prices and are not subject to competitive pressure (which tends to drive prices down). Prices can also be stable if they are controlled by governments, but this is increasingly rare. In most cases, however, prices are determined largely by feedstock prices, which are ultimately determined by fluctuations in the prices of commodity fuels and chemicals. The prices of these commodities are set by markets in response to variations in supply and demand, and vary widely over time. 

Expectations are still for large markets for new materials in future, and we are in a much better position to know than we were 10 years ago. Hopefully we are wiser about forecasts too. After allowing for inflation, advanced polymer composites markets are today only about one-third what they were projected to be in earlier forecasts. Growth will be slower but, through better understanding of users needs, we can be more confident that the future will turn out closer to forecast. It s going to take time to get there and it will only happen through commitment to the business, with materials which are competitive and meet a real ne. ... 

This is further complicated in making allowance for inflation effects and life-cycle costing. The normal US practice is to use a factor of about 3% as the normal difference between inflation and interest rates. However, in the United Kingdom the Treasury requires a 7% discount rate as the difference between inflation and the cost of a commercial loan (Unwin and Hall, 1993). This has a highly distorting effect on all life-cycle costing for UK highway structures. 

The caustic shipper is well advised to invest in the quality of the lining. Using the maximum differential cost referred to above, with a modest allowance for inflation, the entire fleet of 550 cars called for in our example coidd have the best coating, rather than the cheapest, applied for an increment of 200,000. If we consider that this might reduce the downtime for maintenance or increase the lifetime of a car by 1%, the size of the fleet could be reduced by five cars. The savings would be well above the 200,000 investment in better linings. 

A recent study by a European ethylene producer indicated that he would have to sell ethylene at about 450 to 600 per ton by 1985, not even allowing for inflation, to obtain a decent return on his captial investment. So ethylene is going to be very expensive. Whether sugar is going to be that expensive or not, can not presently be predicted precisely but, either way, the sugar producers would not mind very much. 

In this analysis, all costs are evaluated for 2020 when large battery manufacturing plants are projected to be built. All dollar values are brought back to 2010 with allowance for inflation. In other words, all costs and prices are in 2010 dollars. Some materials and battery manufacturing costs are lower than recent values, where we judged that processing improvements for high-volume production would reduce costs. 

The other side of the budgeting process concerns overhead costs, that is costs which are not directly related to the company s ability to generate revenue i Table 4.3 shows the 1999 estimates and the predicted figures for 2000. The general principle used in arriving at these figure has been to increase all the 1999 figures by 5 per cent to allow for inflation and then to increase by a further 21 per cent those overheads that are expected to increase proportionately to the planned increase in staff. The two main exceptions are rent and rates, and interest. In the case of rent and rates, the compaity s rents are fixed... 

Even allowing for inflation, these prices seem extremely good value ... 

Inflationary Effects. Inflation can have a significant effect on the profitabiUty of a venture. However, the U.S. federal tax laws do not allow for indexing the inflationary effects on depreciation schedules, salvage values, replacement costs, or taxable income. Inflation rates can vary unpredictably with time and can differ for certain revenues of expenditures. 

TABLE 9-15 (NPV) Calculations with Inflation Present But Not Allowed For... 

Although it is difficult to carry out economic-feasibility studies on projec ts in a time of high inflation, it is important to try to predict inflation rates and allow for them in such studies. 

In this method each year s savings need to take account of the fact that, as the equipment gets older, the cost of maintenance and repairs is likely to increase. The effect of inflation can also be allowed for in assuming the annual cash flows through the life of the equipment. 

Fluoroplastic FPs have superior heat and chemical resistance, excellent electrical properties, but only moderate strength. Variations include PTFE, FEP, PFA, CTFE, ECTFE, ETFE, and PVDF. Used for bearings, valves, pumps handling concentrated corrosive chemicals, skillet linings, and as a film over textile webs for inflatables such as pneumatic sheds. Excellent human-tissue compatibility allows its use for medical implants. 

An individual product servicing allowance of 58 000 for three products, 46 000 for a further three products, 35000 for a further three products, and a 23000 allowance for the 10th and subsequent products. These allowances only apply to products with NHS sales greater than 100 000 per annum. These figures, agreed in October 1999, are subject to adjustment based on level of inflation. 

Note Balloon angioplasty is a noninvasive procedure in which a balloon-tipped catheter is introduced into a diseased blood vessel. As the balloon is inflated, the vessel opens further, allowing for placement of a stent and improved flow of blood.]... 

Cost correlations based on actual plants constructed by Standard Oil Company of California from the 1960 s through mid-1970 s. In addition to adjustments for inflation, size and known differences in plant location, the base estimates include allowances for ... 

Petrie and Ito (84) used numerical methods to analyze the dynamic deformation of axisymmetric cylindrical HDPE parisons and estimate final thickness. One of the early and important contributions to parison inflation simulation came from DeLorenzi et al. (85-89), who studied thermoforming and isothermal and nonisothermal parison inflation with both two- and three-dimensional formulation, using FEM with a hyperelastic, solidlike constitutive model. Hyperelastic constitutive models (i.e., models that account for the strains that go beyond the linear elastic into the nonlinear elastic region) were also used, among others, by Charrier (90) and by Marckmann et al. (91), who developed a three-dimensional dynamic FEM procedure using a nonlinear hyperelastic Mooney-Rivlin membrane, and who also used a viscoelastic model (92). However, as was pointed out by Laroche et al. (93), hyperelastic constitutive equations do not allow for time dependence and strain-rate dependence. Thus, their assumption of quasi-static equilibrium during parison inflation, and overpredicts stresses because they cannot account for stress relaxation furthermore, the solutions are prone to numerical instabilities. Hyperelastic models like viscoplastic models do allow for strain hardening, however, which is a very important element of the actual inflation process. 

By accounting convention, depreciation is never adjusted for inflation, even if the other costs and revenues are so adjusted. Depreciation is assumed to be constant in this constant-dollar analysis as well. Technically, this assumption is incorrect, as the depreciation cash flows should have been adjusted. However, to minimize the example s complexity, this adjustment was not been made. Another simplification is the assumption of straight-line depreciation. Current U.S. tax laws are more generous, in that they allow for larger depreciation deductions in the earlier years of the project than later. In such cases, the depreciation deduction would vary from year to year. 

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