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Treat Inflation Consistently

# Treat Inflation Consistently - Treat Inflation...

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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. IM&C 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 \$1440 \$1296 x.9 x.9 with a discount rate of 10%, what do you do? Future value. Opportunity cost--should be defined

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