From above table, the relationship between cost in actual monetary units (inflated) in time period ‘n' and cost in constant value monetary units (inflation-free) can be represented as follows;

(3.49)

From equation (3.49), the expression for cost in constant value monetary units (inflation-free) is written as follows

(3.50)

In the above expressions, ‘f' is the inflation rate per year i.e. 5% and the base or reference period is considered as ‘0'. However the above relationship between constant value monetary units and actual monetary units can also be written for any base period ‘b' .

(3.51)

In the above relationship, the base period ‘b' defines the purchasing power of constant value monetary units. As shown in Table 3.7, the actual cost (inflated) of the item in years 1, 2, 3, 4 and 5 are Rs.21000, Rs.22050, Rs.23152.50, 24310.13 and Rs.25525.63 respectively. However the cost of the item in inflation-free or constant value rupees in all the years is always Rs.20000 [i.e. 21000/(1+0.05) 1, 22050/(1+0.05) 2, etc.] i.e. equal to the cost at the beginning. In this example, effect of interest rate i.e. effect of time value of money is not considered.