Page 112 - 5.2 i. Manac Finance ITC Summarised Notes

CAPITAL INVESTMENT APPRAISAL

Inflation

• ALWAYS BE CONSISTENT: Money / nominal cash flows should be discounted at a money /
nominal rate of return and real cash flows should be discounted at a real rate of return.

• Formula: (1 + n) = (1 + r)(1 + i) Includes inflation

• Where n = money / nominal rate of return,

r = real rate of return, and

i = inflation rate

Excludes inflation

Example:

Where a real rate of return is 20% and the inflation rate is 10% then the nominal rate of return is:

(1 + n) = (1 + r)(1 + i)

(1 + n) =(1,20)(1,10)

∴ n = 32%

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