Corporate Finance. Lecture 4. 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
Nominal interest rate – Inflation rate
You own a lease that will cost you $8,000 this year, increasing at 3% a year (the forecasted inflation rate) for 3 additional years (4 years total). If discount rates are 10% what is the present value cost of the lease?
Example - nominal figures
Example - real figures
Inflation rate =10%
Norminal rate =15.5%
NPV rule will suggest Machine A because it has a lower NPV of costs……But, is this correct?
C1>C2, it is cheaper to buy machine B