Inflation 0.0 / 5 ? AccountingInsuranceOtherAQA Created by: Jessmetcalfe00Created on: 14-05-23 13:36 why must inflation be considered in investment appraisal 2 reasons - affects future cash flow - affects the cost of capital required 1 of 9 Whats the real rate of interest the real rate of interest is the cost of capital in the absence of inflation. 2 of 9 What is the money/ nominal rate of interest This is the rate of interst which is adjusted for general inflation (Inflation covered of CPI index) 3 of 9 Do the formual for money rate of interest Money rate = ( 1 + i)x (1 + r) r = real rate i = Inflation 4 of 9 what is general inflation? General inflation is a weighted average of specific inflation rates. usually determined by CPI 5 of 9 what is specific inflation This is the inflation rate of a single item/ revenue/ cost etc 6 of 9 Whats the money @ money method of discounting - adjust the cash flows rev/ cost by their specific inflation - discount at the money rate (Which uses the general inflation rate) 7 of 9 Whast the real @ real method of discounting? - remove general rate of inflation from the money cash flows - discount using the real rate 8 of 9 Calculation of effective interest rate for inflation (1+ E) = (1 + M) / ( 1 + is) E = effective rate M = money rate (may need to calculate this) is = specific inflation 9 of 9
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