Nominal Cash Flows and WACC

0
0

Hi!

I am an engineer new to financial analysis. I am getting confused by nominal cash flows and if this means they should or should not include inflation. For example, the Department of Public Expenditure here in Ireland state on their site “It should be noted that the discount rates above are nominal rates and should be applied to nominal cash flows (i.e. including projected inflation).” http://www.per.gov.ie/en/project-discount-inflation-rates/

But when I Google nominal cash flows it always tells me they should NOT include any adjustments for inflation. Can you help me clarify?

Also, the relationship between nominal cash flows and IRR – if using nominal cash flows, should I take inflation away from the IRR? Is inflation typically included in the IRR?

Thank you, (and thanks for this blog its been very helpful!)

Donna

  • You must to post comments
0
0

Donna; I’m glad that you found my blog useful.

Nominal cash flow does not include inflation. Cash flow adjusted for inflation is real cash flow.

Internal rate of return (IRR) is independent of inflation. The term internal refers to the fact that its calculation does not involve external factors, such as inflation or the cost of capital.

However, for the calculation of net present value (NPV) we can use either nominal method or real method. The website you mention talks about using discount rate to calculate NPV for PPP projects. More information on NPV calculation using nominal / real method could be found at http://accountingexplained.com/managerial/capital-budgeting/npv-and-inflation.

 

  • You must to post comments
Showing 1 result
Your Answer

Please first to submit.

Sign-up and Get Free Feasibility Reports

60 real-life feasibility study reports!