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S.SIVAPRABU A.P / Mech JIT-Thoppur
INFLATION
Inflation is the rate of increase in the prices of goods per period.
PROCEDURE TO ADJUST INFLATION
A procedure to deal with this situation is summarized now.
1. Estimate all the costs/returns associated with an investment proposal in terms of today’s
rupees.
2. Modify the costs/returns estimated in step 1 using an assumed inflation rate so that at each
future date they represent the costs/returns at that date in terms of the rupees that must be
expended/received at that time, respectively.
3. As per our requirement, calculate either the annual equivalent amount or future amount or
present amount of the cash flow resulting from step 2 by considering the time value of money.
INFLATION ADJUSTED ECONOMIC LIFE OF MACHINE
In any industrial/service organization, equipment/machinery forms an important element. The
productivity of any organization is a function of many factors. It is largely affected by efficient
and effective use of machinery and equipment. So, operations and maintenance of these
equipment are very important to the organization.
A machine which is purchased today cannot be used forever. It has a definite economic lifetime.
After the economic life, the machine should be replaced with a substitute machine with similar
operational capabilities. This kind of analysis is called replacement analysis.
The elements of costs involved in the replacement analysis are as follows:
1. Purchase cost (initial cost)
2. Annual operation and maintenance cost
3. Salvage value at the end of every year, if it is significant
S.SIVAPRABU A.P / Mech JIT-Thoppur

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Inflation

  • 1. S.SIVAPRABU A.P / Mech JIT-Thoppur INFLATION Inflation is the rate of increase in the prices of goods per period. PROCEDURE TO ADJUST INFLATION A procedure to deal with this situation is summarized now. 1. Estimate all the costs/returns associated with an investment proposal in terms of today’s rupees. 2. Modify the costs/returns estimated in step 1 using an assumed inflation rate so that at each future date they represent the costs/returns at that date in terms of the rupees that must be expended/received at that time, respectively. 3. As per our requirement, calculate either the annual equivalent amount or future amount or present amount of the cash flow resulting from step 2 by considering the time value of money. INFLATION ADJUSTED ECONOMIC LIFE OF MACHINE In any industrial/service organization, equipment/machinery forms an important element. The productivity of any organization is a function of many factors. It is largely affected by efficient and effective use of machinery and equipment. So, operations and maintenance of these equipment are very important to the organization. A machine which is purchased today cannot be used forever. It has a definite economic lifetime. After the economic life, the machine should be replaced with a substitute machine with similar operational capabilities. This kind of analysis is called replacement analysis. The elements of costs involved in the replacement analysis are as follows: 1. Purchase cost (initial cost) 2. Annual operation and maintenance cost 3. Salvage value at the end of every year, if it is significant
  • 2. S.SIVAPRABU A.P / Mech JIT-Thoppur