Page 277 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

Substituting the equation for F in terms of P, from Equation (9.5), gives

(9.17)

Equation (9.17) is now written in terms of an effective interest rate, i’, which includes the effect of
inflation.

(9.18)

By comparing Equation (9.18) with Equation (9.17), it is seen that i’ is given by

(9.19)

For small values of f < 0.05, Equation (9.19) can be approximated by

(9.20)

Example 9.19 demonstrates the incorporation of inflation into a calculation.

Example 9.19

In this example, consider the effect of inflation on the purchasing power of the money set aside for
retirement in Example 9.17. Previously, the amount of cash available at the time of retirement in 40 years
was calculated to be $774,000. This provided an income of $67,468 for 20 years.
a. Assuming an annual inflation rate of 2%, what is the purchasing power of the cash available at
retirement?