2.3 Stud%20Week%208%20Lect%201%20Problems%20Inflation%20replac%20uneq%20lives.ppt

# 2.3 Stud%20Week%208%20Lect%201%20Problems%20Inflation%20replac%20uneq%20lives.ppt

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1 Problems: Inflation,  Replacement, Unequal  Lives Week 8 Lecture 1

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2 Inflation Replacement Vs. Expansion Unequal Lives “Problems” in Cash Flow Estimation
3 Inflation: needs to be considered INFLATION RULE INFLATION RULE Be consistent in how you handle inflation!! Use nominal interest rates to discount  __________ cash flows. Use real interest rates to discount _____ cash  flows. You will get _____________, whether you use  nominal or real figures

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4 Inflation Example You own a lease that will cost you \$8,000 next year,  increasing at 3% a year (the forecasted inflation rate) for  3 additional years (4 years total). If discount rates are  10% what is the present value cost of the lease? 1 + real interest rate = 1+nominal interest rate 1+inflation rate
5 Inflation Example - nominal figures Year Cash Flow PV @ 10% 0 8000 8,000.00 1 8000 2 3 ____________ _________

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6 Inflation Example - real figures Year Cash Flow PV@6.7961% 0 8,000 8,000 1 8,000 2 8,000 3 8,000 = \$
7 “Problems” in Cash Flow  Estimation Expansion projects initial investment outlays required estimate the cash flows once production begins terminal cash flow Replacement analysis must consider cash flow from ____ the old asset and the new

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## 2.3 Stud%20Week%208%20Lect%201%20Problems%20Inflation%20replac%20uneq%20lives.ppt

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