Chapter 18: Dealing with inflation

As well as having to deal with the uncertainty of forecasting future parameter values that go into the determination of company or project valuation, the valuer is also faced with the likelihood of inflation (increasing parameter values over time). The rates of inflation can be different among parameters and may also change over time. Current or nominal values include the effect of inflation, while constant or real values exclude inflation. It is important that the correct methodologies are applied under an inflationary or non-inflationary environment.

After the appropriate discount rate has been determined, the company’s future cash flows can be discounted by that discount rate to determine the NPV. The discount ...

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