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Question

$\alpha-\beta,$ Inc., a high-tech company in San Diego, whose stock trades on the NYSE exchange, uses a MARR of 25% per year. If the chief financial officer (CFO) said the company expects to make a real rate of return of 20% per year on its investments over the next 3-year period, what is the company expecting the annual inflation rate to be over that time period?

Solution

VerifiedAnswered 2 years ago

Answered 2 years ago

Step 1

1 of 2We would calculate the annual inflation rate over the next 3-year period by equation [14.10]:

$\begin{align*} i+f+i(f)&=\text{MARR}_{f}\\[7pt] 0.20+f+0.20~ f&=0.25\\[7pt] 1.20~ f&=0.05\\[7pt] f&= \boxed{4.2\%}\\ \end{align*}$

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