Overview

Main Menu Name: Erosion

Calculates an investment's yearly cumulative cash flow position (positive or negative) of an investment, year by year. It also calculates the internal rate of return (IRR) on the investment for periods up to 40 years.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

Inflation is defined as a period of rising prices. This has the effect of making the same amount of goods or services more expensive year after year. This translates into an erosion in the purchasing power of each dollar owned or earned by an investor.

The inflation rate, which is an indication of the rate of change in prices, is commonly measured by the Consumer Price Index (CPI) which is published monthly by the U.S. Department of Labor Statistics. The current index is calculated relative to prices in 1982-84, the base year. The index for 1982-84 was set at a figure of 100, meaning that $100 would purchase a standard "market basket" of goods and services. That same basket of goods and services would have cost the consumer $152 at the end of May 1990.

While planning for retirement, college funding, or any other long-term goals, it is essential to consider that costs will be higher in the future and that the dollars in a given fund will buy less because of inflation.

Why should I use this calculator?

• To determine the impact of a given rate of inflation on a stated amount of capital during a particular period of time.
• To measure the adequacy of a fund to meet its intended objectives during an inflationary period.

Getting Started

Inflation is defined as a period of rising prices. This has the effect of making the same amount of goods or services more expensive year after year. This translates into an erosion in the purchasing power of each dollar owned or earned by an investor.

The inflation rate, which is an indication of the rate of change in prices, is commonly measured by the Consumer Price Index (CPI) that is published monthly by the U.S. Department of Labor Statistics. The current index is calculated relative to prices in 1982-84, the base year. The index for 1982-84was set at a figure of 100, meaning that $100 would purchase a standard "market basket" of goods and services. That same basket of goods and services would have cost the consumer $152at the end of May 1990.

While planning for retirement, college funding, or any other long-term goals, it is essential to consider that costs will be higher in the future and that the dollars in a given fund will buy less because of inflation.

Entering Data

1. Amount:  Enter the amount of capital or income.
2. Annual Rate of Inflation:  Enter the projected annual rate of inflation.
3. Number of Years of Erosion:  Enter the number of years to display for the analysis.

Results

The program calculates the reduction in purchasing power of the given amount of capital or income for five annual inflation rates over a 10-year span. The results will display inflation rates that are one and two percent lower and higher than the entered Annual Rate of Inflation, and show time periods five years less and five years greater than the entered Number of Years of Erosion.