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CAPITAL INVESTMENT APPRAISAL


            Inflation




                                               Various revenues and costs rise at the same rate as general inflation.



            • Where synchronized inflation is applicable, it may be easier to ignore
                inflation.

            • However, for exam purposes convert the real rate to a nominal rate and

                adjust the cash flows for inflation.


                   Various revenues and costs do not all rise at the same rate as general inflation
                            (i.e. general inflation is 10% pa but wages increase at 20% pa).



            • However, should differential inflation be applicable the rates and cash
                flows must be adjusted for inflation (no choice).




            NOTE: The interest rate used to discount future cash flows (WACC)
            incorporates inflation (i.e. it is a nominal rate) therefore to be consistent
            the cash flows should also incorporate inflation.




            NB: In a question you can assume the rate and the cash flows given
            include inflation unless otherwise stated.

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