Inflation
You'll learn how inflation affects investment appraisal and net present value calculations—a critical skill for exam success in Performance Management and Advanced Financial Management.
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In this lesson
- 0:00 Understanding inflation in investment appraisal
- 1:02 Real and nominal cash flows explained
- 2:25 The Fisher formula and interest rates
- 3:46 Calculating real cost of capital
- 5:35 Inflation impact on NPV calculations
- 7:28 Applying inflation multipliers year on year
- 8:24 Nominal cash flow adjustments worked example
- 10:14 NPV calculation with multiple inflation rates
About this lesson
This session covers the essential distinction between real and nominal cash flows, introduces the Fisher formula to convert between real and nominal discount rates, and shows you how to adjust for different inflation rates across revenues and costs. You'll work through practical examples demonstrating how inflation compounds year on year and how to build inflation adjustments into NPV spreadsheet models. By understanding when inflation impacts your calculations and when it cancels out, you'll gain the confidence to tackle complex investment appraisal questions accurately.
Duration: 16m
Transcript
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