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Chapter 2

1.3 The impact of inflation

The easiest way of incorporating inflation into an investment appraisal is to inflate all
cash flows into nominal (or money) terms as you forecast future FCF.

Alternatively, leave cash flows in current (or real) terms (not inflated) and adjust the
discount rate for inflation (see later notes on NPV for details).

Current terms cash flow × (1 + inflation rate) = Nominal terms cash flow

1.4 The impact of taxation

There are two main impacts of taxation in an investment appraisal:

 tax is charged on operating cash flows, and

 tax allowable depreciation (sometimes referred to as capital allowances or
writing down allowances) can be claimed, thus generating tax relief.

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