CHAPTER 3 - INFLATION AND ESCALATION.pptx

7/26/2019 CHAPTER 3 - INFLATION AND ESCALATION.pptx

1/29

CGE 660ENGINEERING ECONOMICS O

OIL & GAS OPERATIONS

Chapter 3 INFLATION &

ESCALATIONBY: H USN A H AYATIEPARTMENT OF OIL AN GAS ENGINEERING

FACULTY OF CHEMICAL ENGINEERING

UITM SHAH ALAM


2/29

Topic T!"e #a$%e ' "(e)

T)pe* ' "(e)

I(+at!( C(*%"er Pr!,e I(-e. /CPI

E*,a$at!(

E.,ha(1e rate*

By the end of this chapter, the students will be able to:

Appre,!ate2 e.p$a!( the ,(,ept ' T!"e a$%e ' M(e) a(- app$) the ,(,e"a(a1e"e(t5

E.p$a!( the !(+at!( ,(,ept* a(- a(a$)e !t* !"pa,t t e,(")5

COURSE LEARNING OUTCOM


3/29

e7(!t!(

Pr4e,t : a( !(#e*t"e(t pprt%(!t) 1e(erat!(1 ,a*h +8* #er t!"e Ca*h F$8: the "#e"e(t ' "(e) /!( r %t ' a pr4e,t

I(tere*t: %*e- t "#e "(e) thr%1h t!"e 'r ,"par!*(*5 The re(t 'r $a(e

Ca*h F$8 !a1ra": e*,r!9e* t)pe "a1(!t%-e a(- t!"!(1 ' ,a*h +8* #er *

Pr!(,!pa$: P : ,ap!ta$; A"%(t !(#e*te- r $a(e-

I(tere*t Rate: !; Re(ta$ ,har1e 'r "(e) -e7(e- a* a per,e(ta1e ' pr!(,!pa$ per t!"e per!-

C"p%(-!(1 Per!-; e7(e* h8 'te( !(tere*t !* ,a$,%$ate- /"a) (t 9e pa!- h8e#er

Le(1th ' $a(


4/29

The per,e!#e- #a$%e ' "(e) #ar!e* 8!th the t!"!re,e!pt a(- e.pe(-!t%re5

The !-ea that "(e) a#a!$a9$e at the pre*e(t t!"e "re tha( the *a"e a"%(t !( the '%t%re -%e t !t* ear(!(1 ,apa,!t)5 Th!* ,re pr!(,!p$e ' 7(a(,e hpr#!-e- "(e) ,a( ear( !(tere*t a() a"%(t ' "8rth "re the *(er !t !* re,e!#e-5

The ear$) re,e!pt ' "(e) 8%$- 9e pre'erre-!(#e*t"e(t pprt%(!t!e* p%r,ha*!(1 p8er *e,%+e.!9!$!t) 'r per*(a$ ,!r,%"*ta(,e*5

I(#e*t"e(t pprt%(!t) !* ,(*!-ere- a* the "*t !e$e"e(t !( the a(a$)*!* ' t!"e #a$%e ' "(e)5

TIME ALUE OF MONEY


5/29

I(tere*t !* the 9a*!* ' !(#e*t"e(t a(a$)*!*5 I(tere*t !* the !(,"e8(er ' "(e) a(- ,*t t the (e 8h 9rr8*5 I(tere*t ,a( 9e'r" ':

>5 F!.e- I(tere*t

?5 S!"p$e I(tere*t

35 C"p%(- I(tere*t

App$!,at!(* ' C"p%(-!(1:>5 C"p%tat!( ' ter"!(a$ #a$%e ' a( !(#e*t"e(t

?5 Sh!'t!(1 ,a*h +8* !( t!"e t 'a,!$!tate ,"par!*( r a11re1at!

35 Ca$,%$at!(1 r "(!tr!(1 the a,,%(t 9a$a(,e5

@5 C"p%tat!( ' e*,a$at!(1 ,*t* r pr!,e*5

5 Ra(!(1 ' !(#e*t"e(t* ( the 9a*!* ' ter"!(a$ #a$%e5

TIME ALUE OF MONEY


6/29

F!.e- I(tere*t e* (t tae !(t a,,%(t 'a,tr ' t!"e5 a$%e !*re1ar-$e** ' $(1 r *hrt per!-5

Fr e.a"p$e a >0D 7.e- !(tere*t ( >00 8!$$ 1e(erate >0 re1ar

8he( !t 8!$$ pa)%t5 I(tere*t ' th!* (at%re ha* (t -eter"!(ate rata $a( ' >00 'r > "(th* 8%$- 9e "re 9e(e7,!a$ tha( a $a

'r 6 "(th*5 The $a(er 8!$$ *t!$$ ha#e t pa) %t >0 re1ar-$e**5

FIE INTEREST


7/29

S!"p$e I(tere*t !* -e7(e- a* a ,(*ta(t prprt!( ' the !(!t!a$ a"per!-:

A( pa)"e(t re,e!#e- a'ter ( )ear*

A !(!t!a$ a"%(t !(#e*te-

( !(#e*t"e(t -%rat!( ' ,erta!( )ear*

! *!"p$e !(tere*t rate

Fr e.a"p$e : A( !(#e*t"e(t ' >00 tae( at >0D !(tere*t 'r ( ,"p%(-!(1

A( >00 /> />0 . 05> >00 /? ?00

SIMPLE INTEREST


8/29

C"p%(- I(tere*t !* -e7(e- a* prprt!( ' the a,,%"%$ate!(#e*t"e(t5 The !(tere*t ,har1e- r pa!- !( the ,%rre(t )ear prprt!( ' !(tere*t !(,%rre- !( pre#!%* )ear*5

COMPOUN INTEREST


9/29

Fr e.a"p$e: A( I(#e*t"e(t ' >00 at >0D !(tere*t 'r >0 )ear*A( Pa)"e(t re,e!#e- a'ter >0 )ear*

A I(!t!a$ a"%(t !(#e*te- >00

( I(#e*t"e(t -%rat!( ' >0 )ear*

! C"p%(-e- !(tere*t rate ' >0D

A( >00 /> 05>>0 >00 /?5J@ ?J5@

COMPOUN INTEREST

Year Capital Interest Pay

> >00 /05>K>00

>>

? >>0 /05>K>>0

>?

3 >?> /05>K>?>

>3

@ >33 /05>K>33

>@

6

J

>0 ?


10/29

O'te(t!"e* ,"p%(-!(1 !* -(e at "re tha( (,e /*e"! a((%a$$) "(th$) 8ee$) r -a!$)5

Per!- !(tere*t !* the prprt!(a$ !(tere*t 8h!,h !* a-ea,h ,"p%(-!(1 per!-5 The*e per!-* "a) 9e a()

t!"e 9%t *h%$- (r"a$$) 9e e%a$ !( $e(1th5

N"!(a$ appr.!"ate !(tere*t !* the per!- !(tere*t t(%"9er ' per!-* !( a )ear5 Th%* !' >D !* a--e- "(("!(a$ !(tere*t rate !* 050> K >? 05>?

NOMINAL ANNUAL INTEREST


11/29

I(#e*t"e(t 1r8th a((%a$$) ,a$,%$ate- 9a*e- ( the '$$8!(1 e% A((%a$ Gr8th

N"!(a$ Gr8th

Let 4 N"!(a$ !(tere*t

p C"p%(-!(1 per!-* per )ear

4


12/29

E.a"p$e: >00Q !(#e*te- 'r >0 )ear* 8!th "(th$) ,"p%(-!(15A( Pa)"e(t re,e!#e- a'ter >0 )ear*

A I(!t!a$ a"%(t !(#e*te-

( I(#e*t"e(t -%rat!( ' >0 )ear*

4 C"p%(-e- !(tere*t rate ' >0D

p > !' a((%a$ ,"p%(- a(- >? !' "(th$) ,"p%(-!(1

A((%a$ Gr8th >00 /> 05>>0 >00 /?5J@ ?J5@

N"!(a$ Gr8th >00 /> 05>0?>?K>0 >00 /?50 ?05

NOMINAL ANNUAL INTEREST


13/29

The Ee,t!#e I(tere*t Rate Ee,t!#e A((%a$ I(tere*t RatE%!#a$e(t Rate /AER r *!"p$) Ee,t!#e Rate !* the !(te( a $a( r 7(a(,!a$ pr-%,t re*tate- 'r" the ("!(arate a* a( !(tere*t rate 8!th a((%a$ ,"p%(- !(tere*t5

It !* a rate %*e- a* *ta(-ar- 9) 8h!,h t ,"pare ,"p%(-!(1 *,he"e*5 The ee,t!#e a((%a$ !(tere*t ra!(#e*t"e(t !* the rate ' !(tere*t 8h!,h !' app$!e- (,e8%$- 1e(erate the *a"e 1r8th a* that !(#e*t"e(t5

EFFECTIE RATE


14/29

Let ! Ee,t!#e A((%a$ I(tere*t C"pare the t8 ,"p%(-!(1 e%at!(*:

C"p%(- I(tere*t

C"p%(- I(tere*t 8!th N"!(a$ Gr8th

Th%*

EFFECTIE RATE


15/29

E.a"p$e: Y% are ere- a ,re-!t ,ar- a(- the !(tere*t rate ( the ,>5D per "(th5

The ("!(a$ rate !* >? . >5 D >D per )ear5

Ee,t!#e !(tere*t rate2

/> >D?>? >

/> 050>>? >

/>50>>? >

05>J6 >J56D

K Fr the *a"e ("!(a$ rate 8hat !* the ee,t!#e !(tere*t rate 'r -,"p%(-!(1

EFFECTIE RATE


16/29

!*,%(t!(1 !* the !(#er*e ' ,"p%(-!(15

A( F%t%re #a$%e

A Pre*e(t #a$%e

/> !

(

!*,%(t 'a,tr! !*,%(t rate

( %rat!(

App$!,at!( ' -!*,%(t!(1

>5C"p%tat!( ' the pre*e(t #a$%e ' a *!(1$e r a *er!e* ' '%t%+85

?5S,ree(!(1 a(- ra(!(1 ' !(#e*t"e(t* ( the 9a*!* ' pre*e(t #

ISCOUNTING


17/29

A((%!t) !* a %(!'r" pa)"e(t e#er) )ear 'r a per!- ' The pre*e(t #a$%e ' a( a((%!t) !*:

P=

P

ANNUITY


18/29

A( !(#e*tr ha* >?0 8!th the*e '$$8!(1 !(#e*t"e(t pt!

Option 1 : ep*!t the "(e) !( a 9a( a,,%(t t ,"p%(- !(tere*t ' D5

I(#e*t"e(t #a$%e re,e!#e- a'ter >0 )ear* !*

A>0 >?0 />50>0 ?036

Option 2 : I(#e*t the "(e) !( a *"a$$ ,"pa() 8h!,300 a'ter >0 )ear*5

I(#e*t"e(t #a$%e re,e!#e- a'ter >0 )ear* !*

L%"p *%" pa)"e(t ' 300

RANQING INESTMENTS


19/29

Option : U*e the "(e) t 9%) a pe(*!( 8h!,h 8!$$ pa) %

)ear 'r >0 )ear*5 The "(e) ,a( 9e !(#e*te- !( the,"p%(- !(tere*t D5

RANQING INESTMENTS

Year Cash !low Co"pound !actor Ter"in

? ?0 />050J 3

3 ?0 />050 36

@ ?0 />050 3

?0 />0506 33

6 ?0 />050 3>

?0 />050@ 30

?0 />0503 ?

J ?0 />050? ?

>0 ?0 />050> ?6

>> ?0 />0500 ?

Tta$ 3>@


20/29

E#a$%ate the pre*e(t #a$%e ' Opt!( ? a(- Opt!( 3 'r -!*,%(t ra

E#a$%ate the !(#e*t"e(t pt!(* 'r !(tere*t rate ' >0D5

RANQING INESTMENTS


21/29

M(e) ' the a) /MO a$* (8( a* C%rre(t $$ar A* Spe(E*,a$ate- $$ar5 MO $$ar !* a$* %*e- !( 9%-1et!(1 p%rp*e*a,t%a$ e,("!, ,a$,%$at!( !* ,arr!e- %t !( MO $$ar*5

Rea$ Ter" $$ar /RT !* the C(*ta(t $$arV !( -!*,%**!(1 a9%t Re'ere(,e )ear "%*t 9e *pe,!7e- *%,h a* RT ?00? RT ?003 et,5 Ie,("!, a(a$)*!* RT $$ar* !* %*e- t reprt pr7ta9!$!t)5

C(#ert!(1 RT t MO:

8here2 ! e*,a$at!( rate ( (%"9er ' )ear* 'r" t-a)

MO S RT

a$%e /MO t ( a$%e /RTtK

/ > ! (

a$%e /RT

( : (%"9er* ' per!-I : !(tere*t per perr!-


22/29

F%t%re ,*t* r pr!,e* are ,""($) "-e$$e- a* a ,"p%(*er!e*5

E.a"p$e : The ,%rre(t !$ pr!,e !* >0000 0503>0 >3@53J


23/29

The pr!,e* ' "*t 1-* a(- *er#!,e* ,ha(1e #er t!"e5 I(+arate at 8h!,h the 1e(era$ $e#e$ ' pr!,e* 'r 1-* a(- *er#!,ea(- *%9*e%e(t$) p%r,ha*!(1 p8er !* 'a$$!(15 Ce(tra$ 9a(* *tp *e#ere !(+at!( a$(1 8!th *e#ere -e+at!( !( a( atte"pt te.,e**!#e 1r8th ' pr!,e* t a "!(!"%"

A* !(+at!( r!*e* e#er) -$$ar 8!$$ 9%) a *"a$$er per,e(ta1e ' a

e.a"p$e !' the !(+at!( rate !* ?D the( a > pa, ' 1%" 8!$$ !( a )ear5

M*t ,%(tr!e*W ,e(tra$ 9a(* 8!$$ tr) t *%*ta!( a( !(+at!( rate

INFLATION


24/29

There are *e#era$ #ar!at!(* ( !(+at!(:

e+at!( !* 8he( the 1e(era$ $e#e$ ' pr!,e* !* 'a$$!(15 Th!* !* the pp*!te

H)per!(+at!( !* %(%*%a$$) rap!- !(+at!(5 I( e.tre"e ,a*e* th!* ,a( 9rea-8( ' a (at!(W* "(etar) *)*te"5 O(e ' the "*t (ta9$e eh)per!(+at!( ,,%rre- !( Ger"a() !( >J?3 8he( pr!,e* r*e ?00D !(

Sta1+at!( !* the ,"9!(at!( ' h!1h %(e"p$)"e(t a(- e,("!, *ta1!(+at!(5 Th!* happe(e- !( !(-%*tr!a$!e- ,%(tr!e* -%r!(1 the >J0* e,(") 8a* ,"9!(e- 8!th OPEC ra!*!(1 !$ pr!,e*5

INFLATION


25/29

C*t* ' pr-%,t* a(- *er#!,e* !( the E&P *e,t!(,rea*e #er t!"e5

The C(*%"er Pr!,e I(-e. /CPI r Reta!$ Pr!,e I(-e. e) !(+at!( !(-!,atr a(- %*e- t e*t!"ate p%r,ha*!(!( the e,(")5 It !* a "ea*%re that e.a"!(e* the a#era1e ' pr!,e* ' a 9a*et ' ,(*%"er 1-* a(- *%,h a* tra(*prtat!( '- a(- "e-!,a$ ,are5

The CPI !* ,a$,%$ate- 9) ta!(1 pr!,e ,ha(1e* 'r ea,the pre-eter"!(e- 9a*et ' 1-* a(- a#era1!(1 t-* are 8e! hte- a,,r-!( t the!r !" rta(,e5 Ch

CUSTOMER PRICE INE /CP


26/29

CPI !* %*%a$$) ,a$,%$ate- 9) a 1#er("e(t 9-) *%,epart"e(t ' Stat!*t!,* r Nat!(a$ Re*er#e Ba( et,5

A #ar!et) ' ,(*%"er 1-* a(- *er#!,e* are re#,a$,%$ate th!* #a$%e5 U*%a$$) the CPI !* a((%(,"(th$)5

S"et!"e* re'erre- t a* hea-$!(e !(+at!(V

CUSTOMER PRICE INE /CP


27/29

INFLATION MEASUREMENTCo""odi

ty$ty in !i%ed Basket

&'nits(2))2 2)12

F- 00 >500 00 >5?

C$th!(1 ?00 500 >000 6500

F%e$ 0 ?500 >00 3500

Tta$ >600


28/29

P$a((!(1 'r !(+at!( 8!*e ,*t!(1 ' pr4e,t* ta!(1 !(t a,,%(

e,("!, ,(-!t!(*

F!.e- Pr!,e C(tra,t 7.e- *%pp$!er


29/29

TUTORIAL> /HITEBOAR

65 A ,"pa() ha* 9rr8e- a( a"%(t ' MYR30 MM 'r" the 9a( !( ?0>@5 8!$$ 9e re$ea*e- !( three /3 pha*e* !( Za(%ar) ?0> Za(%ar) ?0>6 a(- Za(%arRepa)"e(t 'r the $a( ha* t 9e "a-e !( '%r ,(*e,%t!#e )ear* 'r" Za(%a

Za(%ar) ?0??5 I' the !(tere*t rate !* 7.e- at >?D per a((%" ,a$,%$ate the a((repa)"e(t5

5 eter"!(e the !(tere*t rate i, !' a( a"%(t ' MYR >000 8a* !(#e*te-

1e(erate RM ?>5J3 !( ?0>@5

5 The Reta!$ Pr!,e I(-e. !(,rea*e- 'r" @@0 t 6?5 !( the per!- ' >0 )ethe per!- ' the t!"e 'r p%r,ha*!(1 p8er ' the !(#e*t"e(t t -%9$e a,"p%(-e- rate !( /5

CHAPTER 3 - INFLATION AND ESCALATION.pptx

Documents