Question

Lake City: Park Gazebo Revenues and CPI (1984-2012) Rental Revenue Rental Revenue Rental Revenue Year CPI Year CPl Year CPI 1984 $13,36855 103.933 1994 $21,099.88 148.225 2004 $33,056.72 188.908 98 $14,564.45 10700 1995 $22,435.85 152 383 2005 $36,661.23 19267 1980 $15,487 57 109.692 1996 $23,575.86 156 858 2006 $39,770.85 201.558 987 $16,363.24 113617 1997 $24,924.04 160,525 2007 $41,430.22 207.344 1988 $17,16130 118.275 198 26,63609 163008 2008 4082303 215.254 1989 $18,000.50 123942 1999 $28.247.11 166583 2009 $37,668.88 214.567 990 18,379.25 130.658 2000 29,82921 172.192 2010 $36,647.82 218.085 991 $18,768.42 136.167 2001 $30,719.85 177.042 2011 $39,649.70 224.935 1992 $ 19,026.90 140.308 2002 $30,41706 79867 2012 $40,892.75 229.604 1993 $20,145.731444752003 $ 30,927.76184.000 a. Calculate 2012 constant dollars for the rental revenue. b. Calculate 1984 constant dollars for the rental revenue. c. Create a line graph displaying the nominal dollars, 2012 constant dollars, and 1984 constant dollars across all years of data. d. How would you use these data to create a compelling financial argument to increase rental rates? Would you use all of the data? 3. A member of Lake City's town council-who has been on the city council for almost 25 years, remembers everything, and has a particular fondness for the park-questions the data you have presented. He presents you with a newspaper clipping from 1996 that claims the revenue in 1984 was just under $20,000 per year. Back at your desk, you tackle your new task f determining where this "under $20,000 per year" figure came from as well as how to explain nominal dollars and constant dollars to this member of the town council. a. Using the same nominal dollars as in assignment 2, add a column and calculate 1995 constant dollars. b. Add the 1995 constant dollars data to your graph. c. Using this graph, write a simple explanation about nominal dollars and the use of different ears to create constant dollars. The explanation should be no more than a page and base y written for an audience that does not have a financial background Big East City's Public Works Department is asking for an additional $100,000 for sign repairs in the next budget cycle because its costs have increased by at least that much since 1995. The department has provided you with the information in Table 7.3. Big East City has adjusted funding for each of its departments every year to keep up with the buying power of 4. money

Answer 1

The constant dollar revenue is usually presented as compared to a base year. In this case, since no base year is mentioned, we will assume the base to be 100. This is the base year and all the inflation figures in terms of CPI are quoted in reference to this figure

The constant dollar income is calculated as-

Income in given year/CPI in given year* CPI is base year

Constatnt $$ revenue in 2012- (wrt to base year)

=40892.75/229.604*100

17810.12

Constatnt $$ revenue in 1984- (wrt to base year)

=13366.55/103.933*100

12860.74

Constatnt $$ revenue in 1984- (wrt to 2012)

=13366.55/103.933*229.604

29528.77

Annualized growth rate in revenue	Annualized growth rate CPI inflation
40892.77	229.604	2012
13366.55	103.933	1984
4.07%	2.87%	growth rate
=(40892.77/13366.55)^(1/(2012-1984))-1	=(229.604/103.933)^(1/(2012-1984))-1

It can be seen from above that the revenue income has increased at a higher rate than the CPI inflation. Also, the constant $$ revenue in 2012 is higher than that in 1984. Hence, there appears to be no need to increase the rent

However, in the view of recent events, we can look at the rent from 2007 to 2012.

Annualized growth rate in revenue	Annualized growth rate CPI inflation
40892.77	229.604	2012
41430.22	207.344	2007
-0.26%	2.06%	growth rate
=(40892.77/41430.22)^(1/(2012-2017))-1	=(229.604/207.344)^(1/(2012-2007))-1

It can be seen that the rent in real and constant $$ terms has fallen from the peak of 2007 numbers. While 2007-08 numbers were during the time when the real estate bubble was at the peak, it can be used as argument to raise the rent.

Year	Nominal rent	CPI	2012 nominal rent
1984	13366	103.933	29528
1990	18379	130.658	32297
1996	23575	156.858	34508
2002	30417	179.867	38828
2008	40823	215.254	43544
2012	40892	229.604	40892

In the graph below, nominal rent and CPI are almost overlapping and hence, cant be seen separate