NPV: taxation, working capital, inflation - part 4

In this lesson

1. 0:00 When and how inflation affects NPV calculations
2. 0:59 Inflation's impact on discount rates and investor returns
3. 2:05 Understanding real versus nominal cash flow terminology
4. 3:13 Real versus nominal cost of capital explained
5. 4:25 Calculating nominal discount rate with inflation
6. 6:49 The real at real shortcut method
7. 8:01 Nominal at nominal method for different inflation rates
8. 8:44 Valid methods for NPV with inflation
9. 11:01 Summary: managing taxation, working capital and inflation

About this lesson

This video teaches you to distinguish between real (unadjusted) and nominal (inflation-adjusted) cash flows and discount rates, then apply the correct method to match them consistently. You'll work through practical examples showing when to use the real-at-real method (uniform inflation) versus the nominal-at-nominal method (varying inflation rates), ensuring your NPV calculations accurately reflect the true value of investment decisions. The session builds on earlier NPV concepts by introducing inflation as a complicating factor you'll encounter in exam questions. You'll see how to identify whether information is expressed in real or nominal terms—a terminology distinction that's crucial for getting the right answer. The video covers the formula for converting real discount rates to nominal rates by factoring in general inflation, demonstrates how to evaluate which methods are valid for different scenarios, and shows why matching cash flow and discount rate terminology is essential to avoid calculation errors. By the end, you'll understand how to handle three layers of NPV complexity together: taxation effects, working capital adjustments, and inflation impacts. You'll recognise when inflation can be safely ignored (when all project elements inflate uniformly) and when you must adjust both cash flows and discount rates separately. This prepares you for realistic exam questions where inflation rates vary across different cost and revenue elements, giving you confidence to tackle these multi-step calculations accurately.

Duration: 14m