Business Management - Making Financial Decisions - Money rate

Money rate, capital rationing, and Sensitivity Analysis 

Money rate 

The issue with some NPV is that they ignore inflation, which is the concept that prices rise over time so for example; the value of £1 today maybe be £1.10 in future.

Formula

Money rate = (1 + Real rate) x (1 + Inflation rate) = 1 + Money rate so to get money rate; 1 + Money rate - 1

Capital rationing

Definition: Refers to the situation in which a business may be unable or unwilling to undertake wealth to enhance investment opportunities because it cannot or does not…