Whenever you purchase something like an item of clothing, or even milk at the market, you may be tempted to remember how much less the item cost when you were younger. One of the reasons the cost of goods rises is because of inflation. If inflation rises, more money is required to purchase the same item over time.
For most currencies, inflation rates fluctuate in a range of 2% to 8% per year, making the impact of inflation somewhat predictable (Blank and Tarquin, p. 377). But on rare occasions of government instability, inflation can rise quickly, becoming hyperinflation, and can compromise entire economic analyses. The currency devalues too quickly to make accurate predictions on future worth.
Imagine you work for a construction company that is considering a contract for a public sector highway project in another country. This country has battled excessive inflation in the past, but for the last 15 years inflation has been stable at around 7% to 10% per year. The highway project is expected to take two years to complete. The contract would bring in significant revenue to be paid annually in the foreign currency over the next five years in equal installments. If inflation remains stable, the economic analysis forecasts a healthy return. However, the CEO of the company is concerned over what would happen to the projected revenue if hyperinflation were to occur.
For your post this week, how might excessive inflation impact the cost of the project and the projected revenues? What recommendations could you provide the CEO to protect the expected returns from high inflation? For example, would you make changes to the payment schedule, or suggest the payments be made in a different currency? As necessary, search for additional resources on the internet or in the NSAD library to strengthen your recommendations. Be sure to use references from the Learning Resources to support your work.
