A recent college graduate has received the annual salaries shown in the followin

ID: 1256337 • Letter: A

Question

A recent college graduate has received the annual salaries shown in the following table over the past four years. During this time, the CPI has performed as indicated. Determine the annual salaries in year-zero dollars, using CPI as the indicator of general price inflation. A large corporation's electricity bill amount to $400 million. During the next 10 years electricity usage is expected to increase by 75%, and the estimated electricity bill 10 years hence has been projected to be $920 million. Assuming electricity usage and rates increase at uniform annual rate over the next 10 years, what is the annual rate of inflation of electricity prices expected by the corporation?

Explanation / Answer

Let the year zero CPI be 1

Annual salaries in the year zero.

Year’s salary

Calculation

Year-zero salary

Year 1 salary

($34,000 / 2.4) × 1

$14,166.67

Year 2 salary

($36,200 / 1.9) × 1

$19,052.63

Year 3 salary

($38,800 / 3.3) × 1

$11,757.58

Year 4 salary

($441,500 / 3.4) × 1

$129,852.94