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    Capital Budgeting Problems

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    Liza Mae Miranda
    The document discusses fundamentals of capital budgeting. It covers topics such as inflation and capital budgeting, explaining how to adjust cash flows, growth rates, and discount rates for inflation. Formulas are provided for converting between nominal and real values under inflation. The document also discusses how to compute nominal cash flows using either direct inflation adjustment or computation of nominal growth rates.

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    Capital Budgeting Problems

    Uploaded by

    Liza Mae Miranda
    8 views39 pages
    The document discusses fundamentals of capital budgeting. It covers topics such as inflation and capital budgeting, explaining how to adjust cash flows, growth rates, and discount rates for inflation. Formulas are provided for converting between nominal and real values under inflation. The document also discusses how to compute nominal cash flows using either direct inflation adjustment or computation of nominal growth rates.

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    The document discusses fundamentals of capital budgeting. It covers topics such as inflation and capital budgeting, explaining how to adjust cash flows, growth rates, and discount rates for inflation. Formulas are provided for converting between nominal and real values under inflation. The document also discusses how to compute nominal cash flows using either direct inflation adjustment or computation of nominal growth rates.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pptx, pdf, or txt
    8 views39 pages

    Capital Budgeting Problems

    Uploaded by

    Liza Mae Miranda
    The document discusses fundamentals of capital budgeting. It covers topics such as inflation and capital budgeting, explaining how to adjust cash flows, growth rates, and discount rates for inflation. Formulas are provided for converting between nominal and real values under inflation. The document also discusses how to compute nominal cash flows using either direct inflation adjustment or computation of nominal growth rates.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    of 39

    Fundamentals of Capital Budgeting

    John Michael T. Delos Reyes

    JTD 2020 CONFIDENTIAL March 2020 1


    Fundamentals of Capital Budgeting

    JTD 2020 CONFIDENTIAL March 2020 2


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    Fundamentals of Capital Budgeting

    Inflation and Capital Budgeting

    INFLATION
    • Rise in general level of prices;
    • Increases cost of living.

    REAL – Without inflation


    NOMINAL – With inflation

    CAPITAL BUDGETING:
    • Growth rates
    • Cash flows
    • Discount rates

    JTD 2020 CONFIDENTIAL March 2020 28


    Fundamentals of Capital Budgeting

    Inflation and Capital Budgeting


     Growth rates

    Nominal Growth rate (a.k.a. inflating) = ( 1 + real growth rate) * (1 + inflation rate)
    Real Growth rate (a.k.a. deflating) = ( 1 + nominal growth rate) / (1 + inflation rate)
    Notes:
    • Straight up, same period. You cannot use data from different periods (e.g., you cannot use inflation for period 1 to get
    the nominal growth rate for period 2, it has to be inflation for period 2 and real growth for period 2 to compute for
    nominal growth in period 2.)

    JTD 2020 CONFIDENTIAL March 2020 29


    Fundamentals of Capital Budgeting

    Inflation and Capital Budgeting


     Cash Flows

    Nominal Cash flows (a.k.a. inflating) = Real Cash Flows * (1 + inflation rate)
    Real Cash flows (a.k.a. deflating) = Nominal Cash Flows / (1 + inflation rate)
    Notes:
    • When accounting for inflation in nominal cash flows, it must be cumulative. (e.g., when computing for nominal cash
    flows in period 2, inflation rates for both periods 1 and 2 must be accounted).

    JTD 2020 CONFIDENTIAL March 2020 30


    Fundamentals of Capital Budgeting

    Inflation and Capital Budgeting


     Cash Flows

    2 Methods in computing for Nominal Cash Flows. (assuming you will start at real CFs (i.e., real CFs and/or growth rates
    are given).
    Method 1:
    A. Compute for real CFs using real growth rates (grow the real CFs);
    B. Convert real CFs to nominal CFs by incorporating (cumulative) inflation

    Method 2:
    C. Compute for nominal growth rates;
    D. Grow the initial real CF by nominal growth rates and you will automatically get nominal CFs.

    JTD 2020 CONFIDENTIAL March 2020 31


    Fundamentals of Capital Budgeting

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    Fundamentals of Capital Budgeting

    JTD 2020 CONFIDENTIAL March 2020 37


    Questions and Answers

    JTD 2020 March 2020 38

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