+7 925 966 4690, 9am6pm (GMT+3), Monday – Friday
ИД «Финансы и кредит»

JOURNALS

  

FOR AUTHORS

  

SUBSCRIBE

    
Financial Analytics: Science and Experience
 

Effects of inflation and their modeling in investment evaluation objectives

Vol. 8, Iss. 26, JULY 2015

PDF  Article PDF Version

Received: 21 May 2015

Accepted: 1 June 2015

Available online: 26 July 2015

Subject Heading: ASSESSMENT AND APPRAISAL ACTIVITIES

JEL Classification: 

Pages: 33-52

Ibragimov R.G. Russian Presidential Academy of National Economy and Public Administration, Moscow, Russian Federation
ibrauf@rambler.ru

Importance The article deals with actual issues of developing the methodology for considering inflationary effects as part of investment evaluation and capital budgeting. Academic specialists and practitioners often refer to this problem and release a lot of publications in the leading scientific journals.
     Objectives The research examines the effect of inflation on separate components and present value of the future cash flows in the operating entity or investment project in order to generate a framework for elaborating reasonable recommendations on the way to interlace an inflationary aspect into the financial model, forecast the future operations and subsequently evaluate feasibility of investment solutions.
     Methods The research employs computer-assisted modeling by setting up and analyzing financial models in accordance with the basic principles of corporate finance.
     Results The research provides a detailed analysis of mechanisms reflecting the direct and indirect effect of inflation, using tools of the modern electronic spreadsheets.
     Conclusions and Relevance In investment evaluation, inflation may influence financial results and present value of future cash flows directly or indirectly. Inflation has a direct effect on accounts receivable, accounts payable and cash needed to move forward operational and financial cycles of corporate operations. The mechanism of a direct inflationary effect is effectuated through the time value of money. Inflation indirectly affects tax payments through three aspects, i.e. depreciation charges, cost of products sold and tax savings on debt interests. The economic effect of indirect inflation is seen when the amount of discounted tax payments changes.

Keywords: investment evaluation, inflation, financial model, computer-assisted modeling

References:

  1. Ang A., Bekaert G., Wei M. The Term Structure of Real Rates and Expected Inflation. The Journal of Finance, 2008, vol. 63, no. 2, pp. 797–849.
  2. Hördah P., Tristani O. Inflation Risk Premia in the Term Structure of Interest Rates. Journal of the European Economic Association, 2012, vol. 10, iss. 3, pp. 634–657.
  3. Kang J., Pflueger C.E. Inflation Risk in Corporate Bonds. The Journal of Finance, 2015, vol. 70, iss. 1, pp. 115–162.
  4. Agrawal S.P. Inflation Maintenance of Capital, and the IRR Model of Capital Budgeting. Decision Sciences, 1986, vol. 17, iss. 1, pp. 1–15.
  5. Feldstein M. The Fed Must Reassure Markets on Inflation. Financial Times, 2009, June 29, p. 28.
  6. Vilenskii P.L., Livshits V.N., Smolyak S.A. Otsenka effektivnosti investitsionnykh proektov. Teoriya i praktika [Evaluation of investment projects. Theory and practice]. Moscow, Delo Publ., 2004, 888 p.
  7. Copeland T., Koller T., Murrin J. Stoimost' kompanii. Otsenka i upravlenie [Valuation: the Value of Companies: Measuring & Managing]. Moscow, Olimp-Biznes Publ., 2005, 562 p.
  8. Koller T., Goedhart M., Wessels D. Valuation: Measuring and Managing the Value of Companies. John Wiley & Sons, 2010, 768 p.
  9. Karev V.P., Karev D.V. Uchet inflyatsii pri provedenii otsenki [Considering inflation in valuation]. Voprosy otsenki = Issues of Valuation, 2005, no. 3, pp. 39–59.
  10. Lewellen W.G., Ang J.S. Inflation, Security Values and Risk Premia. Journal of Financial Research, 1982, vol. 5, iss. 2, pp. 105–123.
  11. Fama E., Schwert G. Asset Returns and Inflation. Journal of Financial Economics, 1977, no. 5, pp. 115–146.
  12. Ritter J., Warr R. The Decline of Inflation and the Bull Market of 1982–1999. Journal of Financial and Quantitative Analysis, 2002, vol. 37, no. 1, pp. 29–61.
  13. Modigliani F., Cohn R. Inflation, Rational Valuation, and the Market. Financial Analysts Journal, 1979, no. 35, pp. 24–44.
  14. Canada J.R., White J.A. Capital Investment Decision Analysis for Engineering and Management. Englewood Cliffs, Prentice Hall, 1996, 566 p.
  15. Osnovy otsenochnoi deyatel'nosti [Fundamentals of appraisal]. Moscow, Moscow International Institute of Information Technology, Econometrics, Finance and Law Publ., 2005, 198 p.
  16. Limitovskii M.A. Investitsionnye proekty i real'nye optsiony na razvivayushchikhsya rynkakh [Investment projects and real options in developing markets]. Moscow, Delo Publ., 2004, 528 p.
  17. Lipsits N.V., Kossov V.V. Ekonomicheskii analiz real'nykh investitsii [The economic analysis of real investment]. Moscow, Ekonomist" Publ., 2004, 347 p.
  18. Brigham E., Erhardt M. Finansovyi menedzhment [Financial Management. Theory and Practice]. St. Petersburg, Piter Publ., 2009, 960 p.
  19. Ross S.A., Westerfield R.W., Jaffe J. Corporate Finance. McGraw-Hill, 2010, 971 p.
  20. Metodicheskie rekomendatsii po otsenke effektivnosti investitsionnykh proektov [Methodological guidelines on evaluating the efficiency of investment projects]. Moscow, Ekonomika Publ., 2000, 421 p.
  21. Ibragimov R.G. Diskussionnye voprosy ucheta faktora inflyatsii v finansovom menedzhmente [Disputable issues of considering the inflation in financial management]. Menedzhment i biznes-administrirovanie = Management and Business Administration, 2014, no. 3, pp. 150–159.
  22. Hong H. Inflation and the Market Value of the Firm: Theory and Test. Journal of Finance, 1977, vol. 32, iss. 4, pp. 1031–1048.
  23. Brealey R., Myers S. Printsipy korporativnykh finansov [Principles of Corporate Finance]. Moscow, Olimp-Biznes Publ., 2008, 1008 p.

View all articles of issue

 

ISSN 2311-8768 (Online)
ISSN 2073-4484 (Print)

Journal current issue

Vol. 17, Iss. 1
March 2024

Archive