Inflation

?
why must inflation be considered in investment appraisal 2 reasons
- affects future cash flow
- affects the cost of capital required
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Whats the real rate of interest
the real rate of interest is the cost of capital in the absence of inflation.
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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)
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Do the formual for money rate of interest
Money rate = ( 1 + i)x (1 + r)
r = real rate
i = Inflation
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what is general inflation?
General inflation is a weighted average of specific inflation rates. usually determined by CPI
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what is specific inflation
This is the inflation rate of a single item/ revenue/ cost etc
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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)
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Whast the real @ real method of discounting?
- remove general rate of inflation from the money cash flows
- discount using the real rate
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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
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Other cards in this set

Card 2

Front

Whats the real rate of interest

Back

the real rate of interest is the cost of capital in the absence of inflation.

Card 3

Front

What is the money/ nominal rate of interest

Back

Preview of the front of card 3

Card 4

Front

Do the formual for money rate of interest

Back

Preview of the front of card 4

Card 5

Front

what is general inflation?

Back

Preview of the front of card 5
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