Question

A bicycle tire company performed a web-based study of a popular tire retail price over time. The study indicated that price is set at $16.00 per tire, it was expected to increase to $19.00 over the next 5 years

a. Determine the annual rate of inflation over 5 years to increase the price from $16.00 to $19.00.

b. Determine the market interest rate that must be used in economic equivalence computations if inflation is considered and an 8% per year real interest rate is expected by this company.

Answer 1

Answer:

(a) inflation rate will be 0.0349

(B) Nominal interest will be 8.0349 %

Explanation:

We have given final price of the bicycle F=$19

Initial price of the bicycle P=$16

(a) Time is given t = 5 years

We know that $F=P(1+i)^T$, here i is inflation rate

$19=16(1+i)^5$

$(1+i)^5=1.1875$

$(1+i)=1.0349$

$i=0.0349$

So inflation rate will be 0.0349

(b) We have given real interest = 8 %

We know that nominal interest rate = real interest rate + inflation rate = 8+0.0349 = 8.0349 %

Answer 2

The annual rate of inflation over 5 years is equal to 3.5%.

Given the following data:

Future value = $19.00

Principal = $16.00.

Time = 5 years.

Real interest rate = 8% = 0.08.

How to calculate the annual rate of inflation.

In order to determine the annual rate of inflation over 5 years, we would use the compound interest formula:

$A=P(1+r)^t$

Where:

• A is the future value.

• P is the principal or starting amount.

• R is the interest rate.

• T is the time measured in years.

Substituting the given parameters into the formula, we have;

$19.00=16.00(1+r)^5\\\\\frac{19.00}{16.00} =(1+r)^5\\\\1.1875 =(1+r)^5\\\\\sqrt[5]{1.1875} =1+r\\\\1.0350=1+r\\\\r=1.0350-1$

r = 0.0350 = 3.5%.

How to determine the market interest rate.

Market interest rate = Real interest rate + Inflation rate

Market interest rate = 0.08 + 0.0350

Market interest rate = 0.115.

Market interest rate = 11.5%.

Read more on interest here: brainly.com/question/24341207