This chapter concentrates upon understanding and calculating the effects
of inflation in time value of money computations. Inflation is a reality that we
deal with nearly everyday in professional and personal life.
The annual inflation rate is closely watched and historically analyzed by
government units, businesses, and industrial corporations. An engineering
economy study can have different outcomes in an environment in which inflation
is a serious concern compared to one in which it is of minor consideration.
In the last few years of the 20th century, and the beginning of the 21st
century, inflation has not been a major concern in the U.S. or most industrialized
nations. But the inflation rate is sensitive to real, as well as perceived,
factors of the economy. Factors such as the cost of energy, interest rates,
availability and cost of skilled people, scarcity of materials, political stability,
and other, less tangible factors have short-term and long-term impacts on
the inflation rate. In some industries, it is vital that the effects of inflation
be integrated into an economic analysis. The basic techniques to do so are
covered here.
