英语论文网

The Discounted Cash Flow Approach to Investment
Inflation, Company Taxation and the Discount Rate
Price Changes and Inflation
•Prices change –why?
–Changes in relative prices
•Sometimes the price of one good (e.g. oil) increases while other prices stay the same
•This is a change in relative prices
–Inflation
•Sometimes there is a general rise in prices e.g. the general price level increases by 5%
•This is inflation
Price Changes and Inflation
•Changes in both relative prices and the general price level
–Sometimes there may be a particularly high increase in the price of one item and …..
–…..a simultaneous (possibly related) increase in the general price level
–For example an increase in the price of oil of 26% may cause…..
–…..an increase in the general price level of 5% so….
–…. there is both a relative price change and an inflation effect
How do we take price changes into account in investment appraisal?
•There are two issues to consider
–Is the investment a good idea –i.e. should we make the investment? and…
–How do we finance the investment?
•For the first question we usually conduct our analysis in constant prices. Why?
–Because we do not want any decisions to be distorted by what the rate of inflation may be at a particular point of time
•For the second question we need to take account of inflation. Why?
–Because we need to know how much money we require to finance the investment
Changes in Relative Prices
• Changes in relative prices
– In our example the rate of increase in oil prices (p) is
26% and…..
– The general rate of inflation (i) is 5%
– The change in the relative price of oil (P) is given by
1 20%
1.05
1.26
1
(1 )
(1 )
   



i
p
P
• In an analysis at constant prices we would allow
for the change in relative prices so we would
inflate the price of oil by 20% but…..
• Would we expect the relative price of oil to
increase by 20% every year?
Changes in Relative Prices
•Table 1 shows the analysis of an investment at Year 0 relative prices
•Table 2 shows the results if there is a continuous change in the relative price of oil –the results look much worse but….
•It is highly unlikely that the relative price of oil would increase continuously by 20%
•Note the difference that it makes to Table 2 if we assume that the oil price change is a one off change (Table 3)
•In the absence of any other information we generally assume that relative prices are unchanged
•If we have good information on a specific item that is significant for our investment we would adjust the relative price
Adjusting for Inflation
• If we expect general inflation to be 5% we could
calculate an inflation factor (IFt) for each year (t) and
inflate all the costs and benefits:
t
t IF  (1 i )
• We could then calculate the NPV and IRR
• The NPV would be higher and…..
&本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。