Inflation may increase the revenue stream before, during or after the cost stream. Competitiveness of the industry also has an impact on how quickly the impact of inflation is reflected in income and cash flow. Inflation may increase wealth created by the project by locking in interest rates on the debt used to finance a portion of the project.
Inflation may increase the revenue stream before, during or after the cost stream. Competitiveness of the industry also has an impact on how quickly the impact of inflation is reflected in income and cash flow. Inflation may increase wealth created by the project by locking in interest rates on the debt used to finance a portion of the project.
Inflation may increase the revenue stream before, during or after the cost stream. Competitiveness of the industry also has an impact on how quickly the impact of inflation is reflected in income and cash flow. Inflation may increase wealth created by the project by locking in interest rates on the debt used to finance a portion of the project.
(WACC) that is used to calculate the net present value of a project, so it must also be included in the cash flow projections.
Inflation and Capital Investment
Analysis
Adjusting current dollars to constant dollars
Constant dollars= Current price / (PIt/ PIb)
Inflation and Capital Investment
Analysis
Real rates of return
Real rates do not include inflation. We cannot observe real rates, but we can estimate what real rates might have been in prior periods. We observe nominal, market or quoted rates. These rates do include expected inflation.
Inflation and Capital Investment
Analysis Timing of the impact
Income and consequently cash flow may or may not be affected
immediately by inflation. Inflation may increase the revenue stream before, during or after the cost stream. The competitiveness of the industry has an impact on how quickly the impact of inflation is reflected in income and cash flow. Inventory can cause a delay in the pass through of cost increases. The practice of annual raises may also delay the the increase.
Inflation and Capital Investment
Analysis Size of the Impact
Inflation may not impact the revenue stream in the
same proportion as it does the cost stream The cost stream may be somewhat independent of the supply and demand characteristics in the finished product market. Examples Tires, Personal Computers, Cereal The competitiveness of the industry also has an impact on how much of the cost streams inflation or deflation is reflected in income and cash flow.
Inflation and Capital Investment
Analysis
While inflation may or may not change income
an increase in the cost stream may cause an increase in the investment in working capital and a decrease in cash flows an increase in price will cause and increase in working capital (accounts receivable).
Inflation and Capital Investment
Analysis
Because depreciation and some inventory methods
are based on historical cost rather than replacement cost taxable income may increase (while being used for additional working capital) cash payments for taxes may increase therefore lowering cash flows
Inflation and Capital Investment
Analysis
By locking in interest rates on the debt used to
finance a portion of the project, inflation may increase the wealth created by the project. Empirical studies have shown that during recent periods of high inflation the value of common stock, on average, has declined with increases in inflation. The equivalent annuity method, adjusted for inflation, can be used for choosing between mutually exclusive projects in the same way that it was used without inflation.