Impacts of Inflation and Interest Rates The domestic rate of inflation in Haiti is assumed to be 9 in Year 1 The rate is expected to decrease by 0 5 in Year 2 and reach the target stable inflation rate of 8 50 Then it is expected to remain at that level in the future The price index for Haiti in Year 1 is 1 00, i e , the base year is Year 1 The nominal interest rate for HTG (Haitian Gourde) loans is 12 9 as of Year 1 Assignment Please work out the following using the template provided to you The projected price indices for Haiti from Year 1 to Year 8 Suppose the price of a Personal Digital Assistant (PDA) is 6,500 HTG in Year 1 It is expected that the real price of PDA's will decrease by 10 per year, from Year 1 to Year 7 What do you expect the cost of PDA to Haitian consumers (nominal price) to be in Year 8 What is the real rate of interest as of Year 1 in Haiti, assuming that the risk premium is zero Assuming that the real rate of interest remained constant over the projected period, forecast the annual nominal interest rates in Haiti that would be consistent with the real rate of interest and the projected rates of inflation Suppose a Haitian firm obtained a 2 5 million HTG loan in Year 1, and the loan principal is to be repaid in equal installments over the following 5 years The interest accrued over the previous year is also paid in the current year What would be the amount of interest expense paid each year over the five year period, expressed Year 1 prices Estimate the annual tax savings per year (in Year 1 prices) that will accrue to this company given that it is subject to a flat corporate tax rate of 30 Estimate the financial Net Present Value (NPV) of the annual tax savings, using the real interest rate in Year 1 as the discount rate What would be the annual tax savings and financial NPV of these savings if the expected rate of inflation were zero over the entire period Use the real interest rate in Year 1 as the discount rate Compare and comment on the differences in tax saving of the with and without inflation scenarios and the impact on the financial NPV of the activity Suppose accounts receivable are estimated to be 50 of sales, accounts payable to be 10 of material purchases, and cash balances to be 10 of sales This company has the following real cash flow profile in Year 1 Using real interest rate as the discount rate, calculate net cash flows of the company under both scenarios of without and with inflation rate Evaluate the impact of inflation on the cash flow statement of this company and explain how inflation might affect the present value of net cash flows Year 2 3 4 5 6 7 Sales revenues 0 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 Material purchases 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 0 Direct labor costs 0 40,000 40,000 40,000 40,000 40,000 40,000

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Posted on Jul 03, 2024

Impacts of Inflation and Interest Rates The domestic rate of inflation in Haiti is assumed to be 9% in Year 1. The rate is expected

Impacts of Inflation and Interest Rates

The domestic rate of inflation in Haiti is assumed to be 9% in Year 1. The rate is expected to decrease by 0.5% in Year 2 and reach the target stable inflation rate of 8.50%. Then it is expected to remain at that level in the future. The price index for Haiti in Year 1 is 1.00, i.e., the base year is Year 1. The nominal interest rate for HTG (Haitian Gourde) loans is 12.9% as of Year 1.

Assignment

Please work out the following using the template provided to you:

The projected price indices for Haiti from Year 1 to Year 8.
Suppose the price of a Personal Digital Assistant (PDA) is 6,500 HTG in Year 1. It is expected that the real price of PDA's will decrease by 10% per year, from Year 1 to Year 7. What do you expect the cost of PDA to Haitian consumers (nominal price) to be in Year 8?
What is the real rate of interest as of Year 1 in Haiti, assuming that the risk premium is zero?
Assuming that the real rate of interest remained constant over the projected period, forecast the annual nominal interest rates in Haiti that would be consistent with the real rate of interest and the projected rates of inflation.
Suppose a Haitian firm obtained a 2.5 million HTG loan in Year 1, and the loan principal is to be repaid in equal installments over the following 5 years. The interest accrued over the previous year is also paid in the current year.
What would be the amount of interest expense paid each year over the five-year period, expressed Year 1 prices? Estimate the annual tax savings per year (in Year 1 prices) that will accrue to this company given that it is subject to a flat corporate tax rate of 30%. Estimate the financial Net Present Value (NPV) of the annual tax savings, using the real interest rate in Year 1 as the discount rate.
What would be the annual tax savings and financial NPV of these savings if the expected rate of inflation were zero over the entire period? Use the real interest rate in Year 1 as the discount rate.
Compare and comment on the differences in tax saving of the with- and without-inflation scenarios and the impact on the financial NPV of the activity.

Suppose accounts receivable are estimated to be 50% of sales, accounts payable to be 10% of material purchases, and cash balances to be 10% of sales. This company has the following real cash flow profile in Year 1.

Using real interest rate as the discount rate, calculate net cash flows of the company under both scenarios of without and with inflation rate. Evaluate the impact of inflation on the cash flow statement of this company and explain how inflation might affect the present value of net cash flows

Year 2 3 4 5 6 7 Sales revenues 0 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 Material purchases 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 0 Direct labor costs 0 40,000 40,000 40,000 40,000 40,000 40,000