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Finanças

Finanças. October 19. Topics covered. Inflation in capital budgeting Interest rate and inflation rate Discounting with inflation Investment with unequal lives. Inflation and capital budgeting. Interest rates and inflation

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Finanças

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  1. Finanças October 19

  2. Topics covered • Inflation in capital budgeting • Interest rate and inflation rate • Discounting with inflation • Investment with unequal lives

  3. Inflation and capital budgeting • Interest rates and inflation • The effect of inflation: The time value of money is deflated by inflation. • Real interest rate vs. nominal interest rate

  4. Inflation and capital budgeting • Approximation • The approximation is reasonably accurate when the interest rate and the inflation rate are low. • Example. Monarchy of Gerberovia has a norminal interest rate of 300% and inflation rate of 280%.

  5. Cash flows and Discount rates • There must be consistency between cash flows and discount rates • Real cash flows should be discounted at • Norminal cash flows should be discounted at • Notice the treatment of depreciations in the two approaches

  6. Cash flows and Discount rates: An example Inflation rate =10% Norminal rate =15.5%

  7. Discount with the nominal rate

  8. Discount with the real rate

  9. Investments of unequal lives • So far, the NPV rule has been our rule-of-thumb. • However, there are situations when the NPV rule is not sufficient. • E.g. when investments under decision have different lengths of life.

  10. Investments of unequal lives Discount rate=0.1

  11. Investments of unequal lives • The NPV rule does not consider the time that each machine will last.

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