Equipment Policy: The Effect Of Inflation On Economic Life And Profits

For the past several years, inflation has placed increasing pressure on our economic system. The total effect of inflation is complex when combined with other factors which affect the economics of equipment. A mathematical model is described herein which can be programmed on a computer to determine the effect of inflation on economic life and profits after taxes. The computer output results in graphic plots which clearly show the relation of various percentages of inflation to life and profits. Inflation has become a common topic of conversation in the recent past. What is it and how can it be measured? What effect does increased inflation have on equipment policy? Research now in progress at the Construction Institute at Stanford University is beginning to unravel some of the mystery of inflation. As a start, let us answer the first question by defining the word inflation. The dictionary says that inflation is "an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level. It appears, in fact, that we are in an inflationary spiral which is "a continuous rise in prices that is sustained by the tendency of wage increases and cost increases to act on each other." 3 Inflation behaves just like compound interest. It takes more dollars of future years to buy an equal amount of a given commodity, be it a material or a service. Let us assume an annual inflation rate of 5 percent. Assume that 1Associate Professor of Civil Engineering, Stanford University, Stanford, California. 2Webster's Seventh New Collegiate Dictionary, Springfield, Mass., G. and C. Merriam Co., 1969. 3Ibid.