Treat Inflation Consistently

Treat Inflation Consistently - Treat Inflation...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Treat Inflation Consistently: (1 + r(nominal)) = (1 + r (real))(1 + inflation rate) Do everything in one or the other (usually it doesn't matter which you use). You cannot avoid making projections of all 3 rates--nominal, real, and inflation--and if you think you can avoid making projections of any one of them, you probably have missed something in your problem. Brealey and Myers go through a long example, IM&C, with investment, depreciation, working capital impacts, salvage values, taxes and tax shields, and so forth. Let me skip over it here; but let me urge you to spend a lot of time on it--because it is a good thing to read to try to assess what you have missed at the end of this, the first unit of the course. Project Interactions Optimal timing of investment. .. Year 1 2 3 4 5 6 7 thereafter "Harvest" Now: $1000 $900 $810 $729 $656 x.9 x.9 x.9 Build a road: -$100 $1300 $1170 $1053 $948 x.9 x.9 x.9 Build and wait: -$100 0 $1500 $1350 $1115 x.9 x.9 x.9 Build and wait 2 years: -$100 0 0 $1600
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

Treat Inflation Consistently - Treat Inflation...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online